Wednesday, August 3, 2011

Ilargi: I was reading Arthur Delaney at The Huffington Post today talk about emergency unemployment benefit extensions, and how they've been strangled in the entire debt ceiling debate debacle, and I was thinking I can't remember having heard one word on job creation during that entire debate.

Which I find an utter disgrace; not just because it's insulting to the 10-20% of Americans who don't have jobs, but also because it should be blindingly clear that without new jobs, and lots of them, the American economy can't possibly recover.

But at least I now know why that is, why no-one in Washington talks about unemployment in connection with the federal debt. All I have to do is look at the stock markets.

According to Google Finance, over the past year, August 4 2010 to August 3 2011, the Dow Jones index has gained 10.41%, while the S&P 500 even rose by 11.48% (at the moment I checked them earlier today). That looks good. But it's only part of the story, and not just because the Dow lost 5.7% and the S&P 6.05% over the past month.

I've had a 'fictional' portfolio of financial stocks for a while now at Google Finance, and used it in posts before. Before today's US market opening, it looked like this:

As you can see, there are a number of stocks in there that not everyone would have in a finance portfolio, and some others that may be missing. But I like it this way. I still left Lehman and Fannie and Freddie in (though none are exchange traded anymore), and included GE and Société Générale, among others.

This portfolio shows a completely different picture than the complete Dow and S&P numbers. The financial world is not doing all that well.

My portfolio is down 15.46% from August 4 2010 to August 3 2011, not up 10% or 11%. What's more, from its peak on February 8, 2011, it's down over 30%. That is in less than 6 months. Here are a few examples from my list:

US banks:

Bank of America's stock is down 34.1% over the past 12 months, 34.51% over the past 6 months, 14.2% over the past month alone.

Citigroup is down 9.78% YoY, 22.64% over 6 months, 13.22% over the past month.

Morgan Stanley: down 24.23% YoY, 30.12% over 6 months, 12.33% over one month.

Goldman Sachs: down 13.95% YoY, 19.93% over 6 months, 3.53% over one month.

JPMorgan: down 3.21% YoY, 12.54% over 6 months, 4.38% over one month.

Foreign banks:

Société Générale: down 34.82% YoY, 36.39% over 6 months, 30.28% over one month.

Crédit Agricole: down 30.9% YoY, 31.66% over 6 months, 30.8% over one month.

Deutsche Bank: down 31% YoY, 17.61% over 6 months, 16.48% over one month

RBS: down 35.61% YoY, 25.12% over 6 months, 17.73% over one month

I guess it should be obvious that we're watching an unfolding bloodbath here (even Goldman lost almost 20% in 6 months). But then again, when JPMorgan CEO Jamie Dimon said recently that banks are so flush with cash they're going to issue nice and juicy dividends, I think he meant, and believed in, what he said. It's just that they're flush with your cash, not their own.

But there's nothing, nothing at all, on the economic horizon that carries even the least bit of hope that these banks will be able to make good on their lost stock values. No jobs increases, no increases in home sales, none of that. They'll just be gutter dwellers, if they stay alive at all, though, granted, your money may provide for plush gutters.

One major issue with all this is that all of the banks above, except for Crédit Agricole, are primary dealers. Wikipedia:

The primary dealers form a worldwide network that distributes new U.S. government debt. [..]

In the United States a primary dealer is a bank or securities broker-dealer that may trade directly with the Federal Reserve System ("the Fed"). Such firms are required to make bids or offers when the Fed conducts open market operations, provide information to the Fed's open market trading desk, and to participate actively in U.S. Treasury securities auctions.

They consult with both the U.S. Treasury and the Fed about funding the budget deficit and implementing monetary policy. Many former employees of primary dealers work at the Treasury, because of their expertise in the government debt markets, though the Fed avoids a similar revolving door policy.

Between them, these dealers purchase the vast majority of the U.S. Treasury securities (T-bills, T-notes, and T-bonds) sold at auction, and resell them to the public. Their activities extend well beyond the Treasury market [..] ... all of the top ten dealers in the foreign exchange market are also primary dealers, and between them account for almost 73% of forex trading volume.

They make the world go 'round with God’s work, if you catch my drift..

Another, and equally important, issue is that these banks were among the recipients of the AIG bailout. And that, of course, gets us back to the derivatives trade. Which will soon, if these developments don't stop, bring us to another bail-out. Well, either that or failing banks.

Société Générale is shedding stock value like it was dandruff (9% today alone). It issued a profit warning today that put the blame on its Greek debt. It also has a lot of liabilities connected to Italy, though. And Spain. Both of which are in the bond market's crosshairs. Greece will soon be back there, and Cyprus will need a bailout imminently. Portugal and Ireland are about to return to the limelight. Belgian sovereign debt is getting pressurized. And even France sees the spread with German bunds widen.

A lot of European banks are going to need serious assistance, and soon. There are no Italian, Greek or Spanish banks in my portfolio, but numbers for banks like Italy's Unicredit (down 47.39% YoY) and Spain's Santander (down 29.51% YoY) are in the lower (worst) range of those I mentioned above.

The EU and ECB are not even going to be able to save all the countries that are in trouble, let alone the banks. All the markets have to do is to slowly tighten the screws, and that's what they will do. If Cyprus is lucky, it can still get a few billion. But the European Financial Stability Facility, which would be needed to fund anything bigger than Cyprus, isn’t even properly set up yet, and already Italy looks like it'll go from net donor to recipient as early as this year.

That would leave more responsibility on Germany. But it just so happens that Germany's own Spiegel magazine writes today:

Germany staged an impressive recovery from the 2008/2009 global economic crisis, but there are increasing signs that the boom is now coming to an end. After almost two years of strong growth, its economic outlook is starting to deteriorate, due to a slowdown in major emerging markets including China and fears of a possible United States recession caused by $2.4 trillion in spending cuts linked to the debt ceiling deal.

Various indicators released in recent weeks point to a deceleration of Europe's largest economy. The Ifo business climate index for July fell sharply to its lowest level in nine months, and analysts say it is likely to keep dropping. The ZEW investor sentiment index showed the weakest level since January 2009. And the Markit/BME purchasing managers' index for the German manufacturing sector fell 2.6 points in July to 52 points, its lowest level since October 2009. "New order levels went into reverse in July, as fewer export sales helped end a two-year period of sustained growth," Tim Moore, senior economist at Markit, said.

Doesn't look like Berlin can carry the entire EU on its shoulders. But then, it never could. The fact is simply becoming more pronounced and obvious now.

So where do the derivatives come in? Remember AIG. Billions of American taxpayer dollars went to foreign banks like Deutsche Bank and Société Générale. There were a lot of voices raised in protest stateside. But they were simply counterparties to derivatives deals AIG had written -and never meant to pay-. In the murky world of derivatives there are many known unknowns, and one of them is that most credit default swaps still originate in US financial institutions, and tons of them, on Greek and Italian debt, for instance, were sold to European banks.

If Greece -or, heaven forbid, Italy or Spain- were to default, and let's make that a "when, not if" for Greece, Société Générale et al will be desperately gasping for air because of their bond losses, the EU and ECB won't be able to come to all the rescues, the only way for these banks to come out alive will be their legitimate claims on CDS written on Wall Street once a credit event has been declared, and the US Treasury and/or Federal Reserve will once again be called upon to save the Mediterranean day at the cost of Joe and Jane Main Street, My Town, USA.

No, I think I do understand why Washington didn't talk about jobs when discussing the debt ceiling (even though Obama goes on a "jobs tour" soon, talk about timing, but Happy Birthday all the same, sir).

They got bigger sardines to fry out there on Capitol Hill. The very big and very ugly kind that eat political careers for breakfast. It’ll be bloody, and not even a fair fight.

The long-term unemployed have been left out of a deal between congressional negotiators and the White House to enact massive spending cuts and raise the nation's debt ceiling before its borrowing limit is reached on Tuesday.

Under the so-called grand bargain President Obama tried to strike with House Speaker John Boehner (R-Ohio), federal unemployment benefits would have been extended beyond January 2012, when they are set to expire. But those negotiations collapsed in July. On Sunday, congressional leaders and the administration crafted a not-so-grand bargain that will cut spending without raising taxes or preserving stimulus programs like federal unemployment insurance.

Asked Sunday night why spending to help the unemployed had been left out of the deal, a White House official said, "because it had to be part of a bigger deal to be part of this."

In other words, Democrats need significant leverage to get Republicans to agree to additional spending on the unemployed. Federal unemployment insurance programs, which kick in for laid off workers who use up 26 weeks of state benefits, cost a lot of money: Keeping the programs through this year required an estimated $56 billion. In December, Democrats only managed to keep the programs alive for another 13 months by attaching them to a two-year reauthorization of tax cuts.

Anyone laid off after July 1 is ineligible for extra weeks of benefits under current law. People who started filing claims in July who exhaust their six months of state benefits in January will be on their own. (People who are in the middle of a "tier" of federal benefits will probably be able to receive the remaining weeks in their tier, but they will definitely be ineligible for the next level up.) Since 2008, layoff victims could receive as many as 73 additional weeks of benefits, depending on what state they lived in.

Nearly 4 million people currently claim benefits under the two main federal programs (known as Emergency Unemployment Compensation and Extended Benefits), according to the latest numbers from the Labor Department. Another 3 million are on state benefits.

The White House official suggested it would be easier for the administration to preserve a Social Security payroll tax cut enacted as part of the December deal because Republicans would view its expiration as a tax increase. "The payroll tax cut will be extended because if they do not that would be a tax increase on every American, something I'm confident, if you believe Speaker Boehner when he says we will not have tax increases, it will have to be [extended]," the official said.

Asked if the White House would continue to push for a reauthorization of federal unemployment benefits, the official said, "Absolutely, we will absolutely keep pushing for that." The unemployment rate is not expected to come down anytime soon, and economic forecasters said earlier versions of the deal currently awaiting action in Congress would significantly slow economic growth because of reduced government spending.

Judy Conti is a lobbyist who deals with Congress and the administration for the National Employment Law Project, a worker advocacy group. She agreed with the official that unemployment benefits would have to be part of a big deal. "Things like the payroll tax holiday and unemployment insurance are controversial and increasingly partisan issues. In order for those to be resolved so far in advance before their expiration there would have had to have been a very significant deal," Conti said. "Once the grand bargain died, the chance for any meaningful stimulus died as well."

July was a HUGE month for layoffs according to a survey from Challenger.

The announcement:

A sudden and unexpected burst in private-sector downsizing pushed the number of announced job cuts to a 16-month high of 66,414 in July, according the latest report on downsizing activity released Wednesday by global outplacement consultancy Challenger, Gray & Christmas, Inc.

The 66,414 job cuts last month were up 60 percent from the previous month, when employers announced plans to shed 41,432 workers. The July figure was 59 percent higher than the 41,676 layoffs recorded in July 2010. It was the largest monthly total since March 2010, when 67,611 job cuts were announced by the nation’s employers.

The July job-cut surge was dominated by a flurry of large layoffs by a handful of private-sector employers, including Merck & Co., Borders, Cisco Systems, Lockheed Martin and Boston Scientific. The job cuts from these five companies alone accounted for 38,100 or 57 percent of the July total.

Having ceded considerable ground to Republicans in the debt ceiling fight, President Obama set out Tuesday to reclaim the initiative on the economy, promising a new effort to spur job creation while seeking to position himself as a proven voice of reason in an era of ideological overreach.

After being cloistered in Washington for a month haggling with Congressional leaders, Mr. Obama will embark on a bus tour of the Midwest the week of Aug. 15 — a chance to show his commitment to reviving the economy in a region of important electoral battlegrounds, and to turn the page from the tangled, often toxic, debate in the capital.

On the policy front, Mr. Obama shifted quickly to pushing Congress to adopt a raft of familiar measures to stimulate the flagging economy, including extending the payroll tax suspension for workers, beefing up benefits for the unemployed, approving trade agreements and investing in infrastructure projects.

“While deficit reduction is part of that agenda, it is not the whole agenda,” a grim-faced Mr. Obama said in the Rose Garden moments after the Senate approved the debt limit deal. “Growing the economy isn’t just about cutting spending.” He later added: “That’s not how we’re going to get past this recession. We’re going to have to do more than that.”

But the debt ceiling plan, with its emphasis on cutting government spending, underscores the constrained atmosphere in which Mr. Obama is operating. While he promised on Tuesday to present new ideas to encourage companies to hire workers, a senior aide acknowledged that Mr. Obama had no “magic beads.” And given the polarized climate on Capitol Hill, winning legislative approval of his initiatives, already daunting in most cases, will be that much more challenging.

Mr. Obama’s embrace of deficit reduction provides him an opportunity to help win back the independent voters who were crucial to his victory in 2008. But the president may need to do some repair work with Democrats angered by the deep cuts in the plan — and a perception, held by some liberals, that Mr. Obama was rolled by the Republicans in the House.

On Wednesday, he will attend a Democratic fund-raiser in Chicago on the eve of his 50th birthday, his first chance since the end of the debt showdown to frame a contrast with the Republicans in a purely political environment. “There are parts of the base that are discouraged,” Ted Strickland, a former Democratic governor of Ohio, said in an interview. “I don’t know that it’s the result of any personal animosity toward the president, but going forward it’s going to be important for him to inspire us, lead us, challenge us and be a real leader.”

White House officials dispute that the president is in trouble with Democratic voters, whom they say support the debt compromise by solid margins. But there was considerable fence-mending among important Democratic constituency groups. On Tuesday morning, Mr. Obama met with leaders of the A.F.L.-C.I.O. at the White House, while other Democrats scrambled to explain the positive aspects of the deal to influence liberal groups.

Compared with previous landmark legislation, Mr. Obama was uncharacteristically low key in the wake of the Senate vote, in effect keeping the deal at arm’s length. He signed the bill, known as the Budget Control Act of 2011, into law in the Oval Office, with only a few advisers watching and no Congressional leaders on hand. Only a White House photographer recorded the moment. Aside from his remarks in the Rose Garden, he gave no interviews.

While Mr. Obama is hitting the road, White House officials said he would not promote the deal, about which he himself has said he has qualms. If anything, he seems likely to let the matter drop for at least a few days. As one senior aide said, “You want to let the acid out of the air after it’s over.”

Still, heading into an election year, Mr. Obama’s advisers say he will be able to point to his role in the debt negotiations as proof of his ability to be a mature, responsible leader who is able to rise above Washington’s relentlessly partisan fray. The president alluded to that on Tuesday, saying it should not take a “timer ticking down” to disaster to get Republicans and Democrats to work together. “Voters may have chosen divided government,” Mr. Obama said, “but they sure didn’t vote for dysfunctional government.”

David Axelrod, one of Mr. Obama’s closest advisers, said the negotiations showed that “he’s been willing throughout the presidency to forgo scoring the cheap political point to serve the larger interest.”

After Labor Day, the White House also plans to hold town-hall-style meetings where Mr. Obama can talk about the issues, like Medicare and Medicaid, that dominated the recent fiscal debate and will resurface again when a Congressional committee convenes to hash out a second set of deficit-cutting measures. The president will also challenge Republicans to propose their own ideas for reviving the job market.

Mr. Obama’s willingness to engage in serious deficit reduction, aides said, could buy him credibility for his other economic proposals. But Mr. Obama is unlikely to unveil any major new stimulus proposals, since he has exhausted most of the obvious policy options. “Did he just find a little bit of oxygen to pursue a portion of his economic agenda?” said Jared Bernstein, a former chief economic adviser to Vice President Joseph R. Biden Jr. “He may be able to move some helpful things, but even if he can’t, he can certainly go out and push for them.”

The relief in the corridors of the West Wing that an economic calamity had been averted was palpable. But few officials disputed that the deadlock had been a costly distraction from the administration’s agenda. Party surveys show that Mr. Obama has been sullied — along with all politicians in Washington — with independent voters.

The vote tally in the House and the Senate, while stronger than many administration officials had expected only days ago, underscored deep divisions among Democrats across the country. In some states, there was a split between urban and rural legislators, while in other battleground states, entire delegations opposed the plan.

But Jim Messina, the manager of the president’s re-election bid, said the discord among Democrats in Washington did not reflect what campaign officials were hearing from rank-and-file supporters of the president through nightly telephone calls and door-knocking. “There’s a lot of enthusiasm, and I don’t see anything as contentious as this coming down the pike in terms of an intraparty situation,” said David Plouffe, a senior adviser to the president. “There will be a unified, motivated and very aggressive Democratic Party supporting the president next year.”

President Barack Obama’s signature on a bill raising the debt limit sealed a compromise that averted a U.S. default even as it did nothing to narrow the gulf between Republicans and Democrats over tax increases and spending cuts.

The measure postpones the thorniest fiscal dilemmas for later this year when the 2012 election campaign will intensify. A panel of lawmakers must push through a $1.5 trillion debt- reduction package by year’s end -- or risk automatic spending cuts across the government, including defense and Medicare.

That means the disputes that prolonged negotiations on the debt limit will be refought. The stakes were underscored hours after Obama signed the bill when Moody’s Investors Service said it may downgrade the U.S. credit rating for the first time on concern fiscal discipline may ease and the economy may weaken.

Obama, who pressed unsuccessfully during the talks for a "balanced approach" to shrink deficits with tax increases and spending cuts, said the panel must put both on the table. "We can’t balance the budget on the backs of the very people who have borne the brunt of this recession," he said in the White House Rose Garden yesterday. "Everyone’s going to have to chip in. That’s only fair. That’s the principle I’ll be fighting for during the next phase of this process."

Focus on PanelAttention now focuses on the mandate of the 12-member super-committee of lawmakers. Congress would either have to enact the panel’s recommendations by Christmas or send a balanced-budget constitutional amendment to the states for ratification -- an unlikely scenario given Congress’s makeup -- to avoid the across-the-board cuts.

For all the anxiety in Washington over the debt debate, investors made more money buying Treasury securities in July than any month this year -- earning $183,000 for every $10 million invested. They drove yields on 10-year notes -- a benchmark for everything from mortgage rates to corporate debt - - to the lowest levels since November. Treasury 30-year bonds rallied the most in more than a year yesterday. Yields on 30-year bonds dropped 17 basis points, or 0.17 percentage point, to 3.91 percent in New York, according to Bloomberg Bond Trader prices. The 10-year note yields touched 2.60 percent, the lowest since Nov. 9.

Two Weeks to GoCongressional leaders have 14 days to name the group’s members -- the two top Republicans and Democrats in the House and Senate each will name three -- and were already disagreeing about the nature of its work.

Senate Minority Leader Mitch McConnell, a Kentucky Republican, said he would announce his choices "very soon" and predicted the panel won’t raise taxes. House Speaker John Boehner, an Ohio Republican, also said he won’t choose anyone who would back a tax increase.

And Representative Paul Ryan of Wisconsin, the Budget Committee chairman, said in a blog post yesterday that the White House was seeking to make it easier for the panel to "propose the kind of large, job-destroying tax hikes that the president tried so hard to get during this round of negotiations."

Senate Majority Leader Harry Reid, a Nevada Democrat, made it clear he expected the committee to consider using revenue as well as spending cuts to shrink the deficits. "The vast majority of Democrats, independents and Republicans think this arrangement we’ve just done is unfair because the richest of the rich have contributed nothing," he said before calling a vote on the measure. "There has to be some revenue that matches" the spending cuts, he added.

First CutThe legislation cleared the Senate yesterday by a bipartisan 74-26 vote, the day after the House passed it 269- 161. The new law would cut $917 billion in spending over the next decade and raise the $14.3 trillion debt limit by $900 billion, with an additional $1.2 trillion in borrowing authority available early next year. That second round of borrowing would trigger spending cuts of an equal amount unless Congress first enacted the debt-reduction package or, by a two-thirds vote in both the House and Senate, passed the balanced-budget amendment.

The measure drew opposition from lawmakers and interest groups on both ends of the political spectrum, with fiscal conservatives arguing it was insufficient to slash spending and rein in the debt, and Democratic-leaning groups saying it savaged programs for the most vulnerable without asking the wealthy to contribute to deficit reduction through higher taxes.

‘Culture of Overspending’The legislation "continues to perpetuate the culture of overspending and borrowing," said Senator Kelly Ayotte, a New Hampshire Republican who voted no. "This agreement does not reduce the size of government at all."

Even many who supported it said they were doing so grudgingly. "With a heavy heart, there are parts of it that I will struggle to explain and defend, but I can’t let this American economy descend into chaos," said Senator Dick Durbin of Illinois, the second-ranking Democrat. Higher-income people, he said, "should feel that they, too, are called to sacrifice." Democratic-aligned political groups blasted the debt-limit deal and said they would pressure lawmakers who depend on their support to do better in future fights over deficit reduction.

Holding Economy ‘Hostage’"One party held our economy hostage, while the other party failed to stop them," said Justin Ruben of MoveOn.org, whose political action committee backs "progressive candidates." The group’s members "are angry, we are motivated and we will not sit and watch as vital programs like Medicare, Medicaid and Social Security are put on the chopping block to finance more tax cuts to corporations and the wealthy."

Republicans, too, said the legislation would help frame the issues central to the 2012 campaign. In a memo circulated yesterday, Senator John Cornyn, Republicans’ Senate campaign chief, advised 2012 candidates to "remind voters that the only obstacle preventing Congress from passing a Balanced Budget Amendment (BBA) and sending it to the states is the fact that there are too many Senate Democrats, and too few Senate Republicans."

Pain from the fiscal deal agreed this week by President Barack Obama and congressional leaders will mostly be felt from 2013, with most of the specific cuts still to be hashed out by lawmakers.

The delayed implementation of the reductions in US deficits could raise concerns about whether they will ever happen. But a lobbying frenzy is already under way in Washington as different groups and special interests attempt to protect their positions in forthcoming negotiations.

"Everyone understands that we could be months away from another serious discussion on cuts and policy that could affect everyone," says one Republican lobbyist. "Everybody is at some risk."

The first step in the budget agreement involves a $917bn cut in discretionary spending accounts over the next years – with slightly more than a third of those savings – roughly $350bn – coming from the defence budget. Those reductions will affect a variety of government agencies that annually receive federal funds to operate: the Environmental Protection Agency, the Securities and Exchange Commission, the National Institutes of Health and Centers for Disease Control could all be targeted for cuts depending on what powerful congressional appropriators decide each year.

These areas of the US government are already experiencing cutbacks. As a result of the April budget deal that narrowly averted a government shutdown, $38.5bn was slashed from discretionary spending accounts for the current fiscal year, which ends in September.

But, this week’s budget deal puts the brakes on those reductions, with only a further $7bn cut from the discretionary budget for the 2012 fiscal year, a key Democratic demand amid a weak economy and a presidential election on the horizon. Indeed, the bulk of the discretionary cuts is due after 2013, binding the next Congress and the new administration to spending levels that they might not want to accept and could potentially modify.

The next step in this week’s budget deal involves the establishment of a joint committee of 12 lawmakers that will report back on November 23 with a set of recommendations on further fiscal reductions of $1,500bn over the next decade. On the table are reductions to the largest, most costly and most popular government programmes – such as Medicare, Medicaid, and Social Security – that are essentially on autopilot since they do not need to be reviewed by Congress each year.

High on the list of potential changes are measures that were proposed by the White House in closed-door negotiations with Republicans over a "grand bargain" fiscal deal that eventually fell apart. These could include a change in the measure of inflation used by the US government, which could trim Social Security, the pension scheme. Also possibly on the table is an eventual increase in the age of eligibility for Medicare, the health scheme for the elderly, from 65 to 67.

Also potentially up for grabs are more than $1,000bn in special tax breaks and deductions that benefit individuals and businesses and could be limited or even eliminated to increase revenues and lower tax rates.

But the committee could fail to muster the majority that would be required for an automatic vote in both houses of Congress for the proposal. In that case, a penalty would kick in, forcing $1,200bn in reductions – half from the defence budget, with the rest from other areas of spending, including cuts to Medicare providers, such as hospitals and drug companies. That too would take effect only in 2013, however.

"Some groups will look very closely to see if they would be better off with automatic cuts or try to work out a special deal with the joint committee," says Jeffrey Birnbaum, a former Washington Post lobbying reporter now president of BGR Public Relations in Washington. "Many, many interests have a lot at stake."

For American workers -- both those employed and those looking for work -- the deal reached over the weekend to stave off an American default could spell disaster, labor economists say.

The deal struck between Obama and congressional leaders, announced Sunday night, may have averted a historic U.S. default, but the $917 billion dollars in cuts planned for the next decade could worsen an already stagnant labor market.

While many of the specifics of the planned cuts have yet to be settled, with less government spending to lift the labor market, employed workers, full- or part-time, could enjoy less job security and increasingly stagnant wages, economists say. And those without a job will face an ever more difficult route back to employment. An extension of federal unemployment insurance for the long-term unemployed, discussed in negotiations as late as July, was not included in the final plan. And cuts to government and state spending will likely mean that following months of decreases in public sector employment, even more government workers will be laid off.

"This deal represents a consensus of policymakers to look the other way at America's persistent high unemployment," said Lawrence Mishel, president of the liberal think tank Economic Policy Institute. "The deal ensures that unemployment will stay high. It will do nothing to help the labor market and the labor market is deeply distressed right now."

In June, a scant 18,000 jobs were added to the American economy, while the unemployment rate ticked up to 9.2 percent. More troubling still, economists say, is that the rise in unemployment was driven primarily by layoffs in May and June, rather than companies' reluctance to hire. With American manufacturing stalling out in July and GDP growth slowing to a crawl, there is little to suggest that a jump in job creation is on the horizon.

The weekend's deal to prevent debt default will not change this picture. In fact, experts say, it will likely make it worse. Economic historians liken Sunday's deal to Roosevelt's decision in 1937 to try to balance the budget after a robust recovery brought on by New Deal spending, dropping the United States back into the Great Depression. "Despite years and years of study by economic historians that we shouldn't repeat the mistakes of 1937, we seem to be doing it again," said Lawrence Katz, a professor of economics at Harvard University.

The debt deal, as many economists see it, is the opposite of a stimulus: Instead of putting money into the economy to generate jobs and increase demand, money is being taken out. "There's the classic mantra: When the consumer is not spending and business is not spending, then government needs to get in and spend," said John Challenger, the chief executive officer of Challenger, Gray & Christmas, an outplacement consultancy group in Chicago.

But now, the effects of the government's package of spending measures aimed at stimulating the economy are becoming exhausted and the debt deal practically ensures that nothing will soon be on the way to replace it.

Challenger thinks the first areas of the labor market hit by the deal will be government employees and the businesses that depend on government spending. State and local governments have already been slashing payrolls for months, and companies that depend on government contracts -- like Lockheed Martin, a Maryland-based defense contractor that has already begun rounds of layoffs -- will likely cut many more positions. "A lot of those billions of dollars that will be cut in the deal goes to pay people's salaries," Challenger said.

In the private sector, he thinks that the effects won't be as immediate, and said some employers may be feeling relief that the threat of default has passed. "Private sector businesses are saying, 'Let's hope that this means that the country is going to be on sounder footing: that we're going to get more access to loans that we need to grow our business, that the economy will be more competitive with the rest of the world.' The big fear is that it's going to take a long time for that to work."

But economists point out, even if employers are feeling relief that the threat of default is passed, that relief may not translate to increased hiring. The majority of hiring decisions are based on consumer demand and sales prospects, not anxiety over a default. And with U.S. consumer confidence dropping to the lowest level since the recession's official end last week, an increase in demand may not come anytime soon.

"To the typical American, in any meaningful way, we are still in a great recession," said Katz, the economics professor. Once you account for population growth, Katz added, "the labor market has shown no recovery at all since the recession's supposed end. We clearly need the federal government, in the short run, providing some kind of demand for labor. This deal signals that there will likely be no attempts at that forthcoming."

There is one aspect of the final debt deal from DC that took me by surprise. I was convinced the 2% reduction in payroll taxes would be extended through 2012. On July 12th I wrote about this and got it completely wrong. Not only did I think there would be a one year extension of the existing holiday; I forecast that the subsidy would actually be increased. I was steered in the wrong direction by the Boss himself. On July 11th Obama stated:

I want to be crystal clear. Nobody has talked about increasing taxes now. Nobody has talked about increasing taxes next year. We’re talking 2013 and the out years.

In the same press conference he added:

(cuts in FICA payroll taxes) would be a component of this overall package.

I don’t think the President said these words without having some sort of understanding with Speaker Boehner. Two weeks ago an economic stimulus was part of the plan. Today there is nothing. I think I understand what may have happened. When push came to shove the FICA holiday got shelved. That had to happen to get a deal done. Why? Because we are so broke we can’t afford the stimulus.

The deal that was reached to get the debt ceiling raised results in a 2012 reduction in expenses of only $21b. This comes to 1/8th of a percent of GDP. Meaningless. But if the tax holiday had been rolled for another year it would have resulted in $120b of additional 2012 expenses (net -$100b). This amount (plus the interest on it) would have wrecked the economics of the overall plan. So what was originally hailed as a good idea (by both sides) was shot down in the end.

I think this is an important development. It points to two things. The first is that we are economically vulnerable and we have no traditional responses. The second is that we are going to hit a very big economic wall on January 1, 2012.

As of the first of the year taxes on payrolls are going up by 2% across the board. This will suck $10b a monthout of consumer’s pockets. I think it will prove to be a critical $10b.

The reason that the current stimulus was directed at FICA taxes is that this was the most progressive way to provide some relief. Those same individuals/families (average income of $37,000) will be hurt the hardest when the rates go back up. For a family with two average incomes the tax increase comes to $1,500 a year.

Will that make a difference?You bet it will. Toward the end of the month many families will get squeezed. (Good luck with your Wal-Mart stock when that starts to happen.)

The $120b in increased taxes will translate to a direct reduction of consumer spending. As a result, GDP will take a hit. The move to FICA taxes will, by itself, reduce GDP by 1/2 to 3/4%. That is a very big deal. One would have to be blind not to recognize that the economy is currently approaching stall speed. And now we have introduced another big headwind. That wind will be blowing in our face in less than five months.

The debt limit crisis has forced the political leaders in DC to throw out the Keynesian playbook. In the end this might be a good thing. But it is going to hurt like hell this winter. Sometime around February we are going to hit a very cold and solid wall. The economy could tank.

Possibly some readers can answer these questions:

Did Obama completely crater on this?Absolutely! Not only did he fold on his base (middle class) he put a landmine in the economy for 2012. Exactly the worst thing for a guy to do when running for office.

Did Boehner also get outmaneuvered?I think he was forced to fold on the FICA stimulus. I’m convinced he wanted to extend the tax holiday. A bad economy is bad for Republicans too.

Is our government functioning properly?Absolutely not! We may have just made the same (similar) mistakes that were made in 1937. I think all of Washington has folded on their responsibilities.

Moody's Investors Service said Tuesday evening that the U.S. will retain its AAA bond rating following passage of legislation to boost the debt ceiling. However, the rating agency said it is lowering the outlook for possible future changes to negative.

Moody's said in a statement that the bill signed into law Tuesday by President Barack Obama had virtually eliminated the risk of a default by the government on its debts. Moody's assigned a negative outlook to the AAA rating to show that there is a risk of a downgrade if the government's fiscal discipline weakens. Fellow ratings agency Fitch Ratings took similar action earlier in the day.

Dems turning on Obama?Democratic lawmakers are openly questioning whether they can trust Obama to cut future deals with Republicans, while disappointment among party activists is raising doubts about their investment in his 2012 re-election campaign.

After Obama backed off his demand for new revenue in the deal to raise the debt ceiling and cut the deficit, several lawmakers said they don't know whether he can be counted on to stand firm on raising taxes on wealthy people and protecting programs such as Medicare. "There was caving this time," said U.S. Rep. Eliot Engel, D-N.Y. "Why don't you think there would be caving next time?"

The months-long debate that brought the government to the brink of a default took a political toll on both parties. The Republican base isn't cheering every element of the agreement, with 66 of the party's lawmakers voting against the deal in the House. The decision by House Republicans to stage a showdown didn't sit well with the public, either.

In a July 20-24 Pew Research Center poll, 66% of respondents disapproved of the job Republican leaders in Congress are doing, while only 25% approved. By comparison, 48% disapproved of how Obama is handling his job and 44% approved. With such disapproval of Republican leadership, that led many to question why Obama didn't play harder hardball, experts said.

What the heck happened?So how did the debt grow from $5.8 trillion in 2001 to its current $14.3 trillion? The biggest contributors to the nearly $9-trillion increase over a decade were:

The 2001 and 2003 tax cuts under President George W. Bush: $1.6 trillion.

Pawlenty: Not a fanRepublican presidential hopeful Tim Pawlenty said Tuesday that the debt ceiling increase Obama signed is akin to taking an aspirin to treat a serious illness. Pawlenty told supporters in a packed coffee shop Tuesday in Tampa that he was disappointed in the deal because lawmakers didn't use the opportunity to address the country's spending problem.

The former Minnesota governor said: "They didn't fix the problem, they just popped a fiscal aspirin and pretended the problem's gonna go away." Pawlenty said cutting the defense budget is a misguided priority and criticized the last-minute deal because a future Congress can overturn it.

All right, so what's next?Obama signaled that Congress still needs to find a balanced approach to reducing the deficit that includes some adjustments to Medicare and reforming the tax code so wealthy people pay more. A new bipartisan super committee of 12 lawmakers chosen over the next two weeks will start the search for at least $1.2 trillion more in deficit cuts over the next decade.

Fitch Ratings said the U.S. is under a review as the nation’s debt burden increases at a pace that isn’t consistent with an AAA sovereign credit rating.

The firm said it expects to complete the ratings review by the end of August given the approval today of debt-limit compromise that prevents a U.S. default. Standard & Poor’s and Moody’s Investors Service Inc. also have the U.S. under review for possible downgrades. "Although the agreement is a good first step in adjusting the fiscal challenges that the U.S. faces, it is just a first step," David Riley, Fitch’s London-based head of sovereign ratings, said in a telephone interview. "Does it mean that the AAA rating is completely secure of the medium term? No."

The U.S. must confront "tough choices on tax and spending against a weak economic backdrop if the budget deficit and government debt is to be cut," Fitch said in a statement today. The ratio of general government debt, including state and local governments, to gross domestic product is projected to climb to 100 percent in 2012, the most of any country with an AAA ranking, Fitch said in April.

President Barack Obama signed the debt-limit compromise on the day the Treasury had warned the nation’s borrowing authority would expire, ending a months-long debate that reinforced partisan divisions over federal spending.

No Magic BulletThe Senate voted 74-26 for the measure, which raises the nation’s debt ceiling until 2013 and threatens automatic spending cuts to enforce $2.4 trillion in spending reductions over the next 10 years. The House passed the plan yesterday. "This agreement, we think, is a net positive," Riley said. "It’s not a magic bullet in terms of the rating. The near-term risks to the U.S. AAA from Fitch are not high."

A downgrade would raise the specter that the wrangling between Obama and Republican lawmakers over spending cuts and taxes will harm American prestige and the global financial system. JPMorgan Chase & Co. estimated that a downgrade would raise the nation’s borrowing costs by $100 billion a year. It could also hurt the rest of the U.S. economy by increasing the cost of mortgages, auto loans and other types of lending tied to the interest rates paid on Treasuries.

Still, U.S. bonds and the dollar have signaled increased demand for the assets of the world’s largest economy even with the prospects of losing the AAA rating rising as the debt talks extended to the deadline when the Treasury said it would exhaust its ability to borrow.

Global DemandTreasury yields average about 0.70 percentage point less than the rest of the world’s sovereign debt markets, Bank of America Merrill Lynch indexes show. The difference has expanded from 0.15 percentage point in January. Investors from China to the U.K. are lending money to the U.S. government for a decade at the lowest rates of the year. For many of them, there are few alternatives outside the U.S., no matter what its credit rating.

Ten-year Treasury yields fell to as low as 2.63 percent today in New York, the least since November. The dollar represents 60.7 percent of the world’s currency reserves, compared with the 26.6 percent for the euro, which has the next biggest portion, according to the International Monetary Fund in Washington.

US consumers cut back on spending in June for the first time since September 2009 and incomes rose at the slowest pace in seven months in a further sign of sluggish economic growth.

Consumer spending, which makes up about 70 per cent of the world’s largest economy, fell 0.2 per cent over the month, following a downwardly revised 0.1 per cent rise in May, the commerce department said. Economists surveyed by Bloomberg had expected expenditures to tick up 0.1 per cent. Adjusted for inflation, spending was down 0.1 per cent.

The data followed Friday’s grim report that the US economy grew a tepid 1.3 per cent in the second quarter, with consumer spending contributing just 0.1 per cent. Household budgets were stretched over the quarter as surging oil prices drove petrol above $4 a gallon, but prices at the pump peaked in May and some analysts had hoped that would free up money for spending on other items in June.

"Consumers got some purchasing power back, but did not decide to spend it," said Jonathan Basile, director of economics at Credit Suisse. But with incomes growing just 0.1 per cent over the month – the slowest since November – Americans remained wary. Purchases of long-lasting durable goods fell 0.6 per cent, following a 1.4 per cent drop in May, as car sales remained at low levels following supply disruptions and tight inventories in the wake of the Japanese earthquake.

Adjusted for inflation, incomes rose 0.3 per cent. Inflation grew more slowly in June than May as petrol prices eased. The core personal consumption expenditures price index, the measure preferred by the Federal Reserve, rose 0.1 per cent, half the 0.2 per cent increase in May and less than economists had expected. On a yearly basis, core prices were up 1.3 per cent.

The overall price index, which includes food and energy prices, fell 0.2 per cent after rising 0.2 per cent the previous month. The disparity between rising incomes and falling spending boosted the personal savings rate from 5 per cent to 5.4 per cent, a nine-month high. The jump "reflect[ed] consumers’ tentativeness about the current economic environment. This is no surprise given the collapse in consumer confidence in recent months," Mr Basile said.

First of all, just because the Tea Party people appear to be generally uneducated, ignorant about the political process, ignorant about economics, confused about their own platform from the beginning, and indelicate when it comes to the craft of diplomacy, doesn't mean they're wrong.

They're right about our Debt being a bad thing.

They are right about our Deficit being a bad thing.

They are right about having a balanced budget.

They're even right about taxes (although that really wasn't part of their initial platform exactly).

I've always considered the government taking one out of every two dollars I earn absolute tyranny. Especially since we get almost nothing back compared to every other civilized country. Now Hedge-fund guys and other billionaires paying 19 percent is another matter entirely, but that's an issue of tax reform and closing loopholes and no one objects to that. What the Tea Partyers are not correct about is connecting these things to the Debt Ceiling. But you can't really blame them. They didn't know there was one.

How should they know what's what when they, like most of America, look to Cable TV News and Radio Talk Shows as their exclusive sources of information?

When people are looking for a place to point the finger after this disaster or near disaster they should look no further than the Media. When did their job become spewing out contradictory information 24/7, serving no one except for their aggravatingly plentiful and endlessly annoying advertisers?

All they had to do was have an objective, truly knowledgeable expert available to explain the facts to the general public to help them understand that even though the Tea Party people are saying things that make sense emotionally, the real facts are these -- If the debt ceiling isn't raised, obligations will not be met because this money we're talking about, which we don't have and need to borrow, has already been spent.

And all the Mary Matalins and Rush Limbaughs of the world that are telling us Aug. 2 is a meaningless date, made up by a Left Wing conspiracy, are wrong. You know, wrong. As in let's separate the educated facts from the mindless opinions. As in enough with the so-called balanced reporting already. Tell us the damn indisputable truth!

This time it's the so-called Right mouthing untruths, next week it'll be the Left. Makes no difference to me, I'm a staunch Independent and always have been, does it matter to you who's lying? As most of the population suffers through life, barely surviving, disappointed and confused day after day, hopeless, wondering what happened to their strong and beautiful country, it is in the Media's power to restore, if not some of our quality of life, at least a bit of our peace of mind.

Since we can't have real democracy, or jobs, or a decent wage, or money that has any value, or affordable education, or real health care, or more importantly real health, at least let us have the emotional satisfaction of hating the right people for the right reasons!

The Media has become just another meaningless bureaucratic institution that exists solely for the purpose of keeping the population distracted and diverted by the use of a constant barrage of bad news, intentionally or unintentionally designed to keep us from thinking, acting, and organizing, but mostly to remind us about those starving children in Africa, keeping us grateful that our miserable lives aren't any worse.

A new round of fiscal warfare is in store for the US over the coming months as a new congressional committee is formed to find extra savings from the most sensitive areas of the budget.

The last-minute deal reached by Barack Obama and political leaders in the House of Representatives on Monday night was designed to avert default, but initially does little to solve the US’s long-term debt problems.

That task was instead delegated to a panel of politicians – six Republicans and six Democrats – which will have to issue its recommendations by November 23, with votes on their plan by December 23. The group – which will soon be selected by congressional leaders from both parties – will be asked to identify $1,500bn in deficit reduction over the next 10 years, including cuts to popular government programmes such as Medicare and Medicaid.

But there was already a serious disagreement brewing between Republicans and Democrats over whether tax increases were on the table. This was the main sticking point throughout the debt-ceiling negotiations, and it was rearing its head again even before the new committee was established.

The White House has argued that revenue-raising tax reform would be considered by the panel. "The bottom line is that the joint committee can reduce the deficit through tax reform and eliminating tax expenditures just like it can cut spending," Gene Sperling, director of the National Economic Council, said in a blog post.

But Republican leaders in the House of Representatives have argued that it would be "impossible" for the group to increase taxes. "The big win here for us and for the American people is the fact that there are no tax hikes in the package," Eric Cantor, the House majority leader, said.

The clash over the committee’s mandate suggests the group may have trouble overcoming the political divisions that have plagued the country’s debate over fiscal policy in recent months.

There is a penalty for inaction, however. Failure to reach a compromise would lead to a "trigger" implementing across-the-board cuts worth $1,200bn to all areas of spending in 2013, including a huge hit to defence, as well as reductions in payments to healthcare providers from Medicare, the medical insurance scheme for the elderly.

But there are some exceptions that could leave fiscal hawks worried that the mechanism lacks teeth. Democrats were able to protect social security, Medicaid, the health scheme for low-income US citizens, and jobless benefits from the "trigger", while Republicans ensured that no automatic tax increases would kick in if the committee failed.

"Washington is a place where it helps to have a gun pointing at everyone’s head – some external threat – to motivate action," says Matt McDonald, an analyst at Hamilton Place Strategies in Washington.

Some Democrats have argued that the planned expiration of Bush-era tax cuts at the end of 2012 could constitute a revenue trigger of sorts. This is because if the committee failed to implement tax reform, the Obama administration could simply allow the Bush-era tax relief to lapse. But most Democrats want only Bush tax cuts for the wealthy to expire, and finding a way to separate them from middle-class tax cuts would still pose a challenge.

If the panel struggles, it could be viewed as yet another sign of how the US’s political system is failing to come up with a national consensus on reining in its debt, further irking rating agencies that are reviewing the country’s triple A credit score.

The composition of the panel could matter a great deal. If congressional leaders chose to appoint more members of their parties to the committee who are more open to compromise, it could increase the chances of an agreement.

For instance, the inclusion of supporters, or even members of the so-called "Gang of Six" – a group of senators that reached its own large-scale deficit reduction deal last month – would raise the odds of success.

Conversely, the selection of ideological hardliners from both sides of the aisle might make it more difficult to reach a consensus. But, given the need to pass any plan through Congress, party leaders will also be wary of choosing individuals who might be accused of making too many concessions.

Barack Obama will turn 50 this Thursday, and it would be natural for him to be looking forward to a few gifts. On Sunday night, it looked like he got an early one. The president was able to announce at the White House that the Republicans and Democrats in Congress have agreed on a solution to the debt quagmire.

Finally.

Obama had been calling for a compromise for weeks. But on Sunday night, you certainly couldn't see any joy or signs of a celebrating a success in Obama's gestures.

Sure, the president found appropriate words with which to praise the deal, which had been secured only minutes before on nearby Capitol Hill. "The leaders of both parties,"Obama said, "have reached an agreement that will reduce the deficit and avoid default -- a default that would have had a devastating effect on our economy."

On August 2, the United States will be able to pay its bills again. Global financial markets will be able to breathe a little easier and the feared Armageddon will have been averted.

During the next decade, US federal government expenditures are to shrink by $1 trillion, and a special committee in Congress is expected to outline an additional $1.5 trillion in savings by the end of November. If they are unable to reach a deal on the additional savings, then cuts will automatically be made across the board, including to the defense budget and to social welfare payments -- two extremely expensive programs that are championed by conservatives and liberals.

In exchange, the US debt ceiling will be raised in two stages by up to $2.4 trillion over the current level of $14.3 trillion. This will enable the US government to remain solvent and pay its bills -- at least through 2012, and past the next presidential election.

Concessions Could Harm Obama in the Long RunBut can Obama truly breathe any easier? The compromise deal still has to be approved by the House of Representatives and the Senate. Left-leaning members of the Democratic Party and ultra-conservative Republicans aligned with the Tea Party movement in both houses are unhappy with many of the details in the agreement.

"We're not done yet," Obama said. It could take until Tuesday, the day the US would go bust, until the votes take place, and the results could be very close.

And even if both chambers approve the compromise as expected, the sums may add up to benefit America as a nation, but not necessarily the man leading the country. With an election year ahead, Obama will be spared another deficit battle in 2012, but the concessions he is being forced to make could be damaging to him in the long run. "Now, is this the deal I would have preferred? No," Obama conceded at the White House.

His supporters within the liberal wing of the Democratic Party are already criticizing him. "If I were a Republican, this is a night to party," Emanuel Cleaver, a Democrat from Missouri, told the TV news channel MSNBC on Sunday night.

A colleague, Representative Raul Grijalva of Arizona, lamented that the deal "trades peoples' livelihoods for the votes of a few unappeasable right-wing radicals, and I will not support it." Meanwhile, the New York Times offered the following analysis: "President Obama has moved rightward on budget policy, deepening a rift within his party heading into the next election."

A Shift in Course for ObamaThe spending cuts will hit programs that are particularly coveted by the left-wing of the Democratic Party -- programs aimed at seniors, the poor, children and young people.

At the same time, the Republicans have also managed to keep the issue of raising taxes taboo, despite the fact that the majority of the US population would prefer a mix of austerity measures and a rise in tax revenues. Currently, America's tax ratio is the lowest it has been in decades.

In his remarks on Sunday night, the president emphasized the need for some tax increases. "I believe that we have to ask the wealthiest Americans and biggest corporations to pay their fair share by giving up tax breaks and special deductions," he said. In the planned second round of consultations on spending cuts, tax adjustments could also be back on the table -- at least in theory.

But they wouldn't stand any chance of passage. Of the 240 Republican members of the House of Representatives, 234 have signed a pledge stating they would not approve tax increases, regardless of the circumstances.

"We have changed the debate in the United States, which is a pretty radical thing to do in such a short period of time," Mark Meckler of the Tea Party Patriots told SPIEGEL. "The question back then was: 'How much more will we spend next year?' and not, 'How much can we cut?'"

The compromise also marks a break from Obama's political course up until now. The Democrat long pushed for greater government spending in order to stimulate the stagnant economy. Now, however, the focus will be on austerity, even if many economists feel that is the wrong step given the stagnant US economic growth of 1.3 percent. A fixation on cuts could stall the fragile economic upswing, Obama's former chief economic advisor, Larry Summers, warned in a SPIEGEL last week.

Obama Fears Re-ElectionBut Obama's current political advisors like the austerity measures. They are hoping they can translate into new enthusiasm among voters for Obama, just as Bill Clinton secured his re-election in the mid-1990s with his tough budget discipline.

"Obama's target constituency in 2012 is not his base but rather independent and moderate voters," the Washington Post's Chris Cillizza wrote. "And those fence-sitters love compromise in almost any form."

But in the mid-1990s, Clinton only had to contend with an unemployment rate of 5.7 percent. The jobless rate is currently hovering at over 9 percent. Clinton also showed strong leadership with his savings, managing to decisively ward off conservatives seeking to block his efforts.

Obama, for his part, had long sought to negotiate savings of over $4 trillion behind closed doors with John Boehner, the Republican Speaker of the House. When those talks collapsed because Boehmer was halted by the Tea Party faction, the president became very prickly. "Can the Republicans say yes to anything?" Obama asked. The president then largely retreated from public negotiations on the debt ceiling.

Sunday's compromise can't really be chalked up as any major success for Obama, not least because it was largely the Republicans who succeeded in getting the concessions they had demanded. The latest survey conducted by the Pew Research Center, a US pollster, shows Obama running neck-and-neck against an unnamed Republican challenger in the 2012 election. As recently as May, Obama was still 10 points ahead of any conceivable conservative challenger.

Andrea Saul, spokeswoman for Mitt Romney, the leading Republican presidential candidate, is already throwing jibes at Obama. She claims that the debt crisis began in earnest because of Obama's inability to show strong leadership.

At the same time, it is the very Republicans who are now celebrating who might help steer Obama out of the crisis -- including the one within his own party. If they agree on a presidential candidate who scares left-leaning Democrats, then they will once again flock to Obama -- for better or for worse.

The European money markets have begun to seize up as pressure mounts on the Italian and Spanish banking systems, tracking the pattern seen during the build-up towards the financial crisis in 2008.

The three-month euribor/OIS spread, the fear gauge of credit markets, reached the highest level in two years today, jumping 7 basis points to 40 in wild trading. "Europe's money markets are undoubtedly starting to freeze up," said Marc Ostwald from Monument Securites. "It's not as dramatic as pre-Lehamn but it is alarming and shows the pervasive degree of fear in the markets. People are again refusing to lend except on a secured basis."

The credit stress was triggered by fresh mayhem in the southern European bond markets and ominously in parts of the eurozone's soft core as well, including Belgium. Spanish yields pushed further into the danger zone to 6.42pc. Italian debt reached a post-EMU high of 6.22pc before falling back slightly on reports of Chinese buying.

"We have a revolt taking place by foreign investors in these bond markets," said Hans Redeker, currency chief at Morgan Stanley. "There have been hardly any purchases for several months. We are seeing net disinvestment because people fear that these countries lack the potential to grow their way out of the problem, and risk falling into a Fisherite debt trap."

Mr Redeker said the eurozone needs a lender-of-last resort along the lines of the US Federal Reserve to backstop the Spanish and Italan bond markets. The European Central Bank cannot easly step into the breach under its current legal mandate and treaty authority. "The eurozone faces a very big decision: it either creates a central fiscal authority or accepts reality and starts to think the unthinkable, which is to cut the currency union into workable pieces."

The escalating drama forced Spain's premier Jose Luis Zapatero to delay his holiday in the Doñana biodiversity park near Huelva. A spokesman said he was staying in Madrid "to more closely monitor the evolution of the economic indicators". Mr Zapatero telephoned opposition leader Mariano Rajoy on his holiday in Galicia to keep him informed of the fast-moving events.

In Rome, Italy's president Giorgio Napolitano held a second meeting in days with central bank chief Mario Draghi, the future head of the ECB. There has been speculation in the Italian press that the well-respected Mr Draghi might be called to lead an emergency government to restore market confidence. Finance minister Giulio Tremonti invoked the country's financial crisis committee on Tuesday as the Milan bourse fell to a three-year low, once again led by bank stocks. Fiat fell 6pc after an 11pc drop in Italian car registrations in July.

Mr Tremonti was to talk last night to EU economics commissioner Olli Rehn, who has interupted his holiday in Finland. He will visit Luxembourg on Wednesday for a meeting with Eurogroup chief Jean-Claude Juncker. An EU spokesman said there was "no emergency plan" on the table. "There are no factual reasons that we are aware of that can explain this sudden acute surge in spreads. What matters is that the Spanish and Italian authorities are taking the necessary action towards fiscal consolidation," she said.

Simon Derrick from the BNY Mellon said the trigger for the final denouement in each of the eurozone's bond crises so far has been when the spread over German Bunds reaches 450 basis points, prompting LCH Clearnet to impose higher margin requirements. The Spanish spread hit a record 400 on Tuesday. The political ferment behind the scenes points to a major policy shift, though it is unclear what the EU authorities can do without the full backing of EU leaders. They are mostly on holiday and German Chancellor Angela Merkel does not like to be bounced into decisions.

The EU summit accord in late July has clearly failed to reassure investors. It gave the EFSF bail-out fund powers to buy Spanish and Italian bond pre-emptively but this has to be ratified by all parliaments, which may take four months. Willem Buiter from Citigroup said the €440bn fund is far too small to cope with Italy and Spain, and requires immediate firepower of €2.5 trillion. Such demands risk setting off a political crisis in Berlin.

Credit experts in the City said it was unlikely that China is purchasing bonds from the eurozone periphery. The Chinese central bank's reserve manager SAFE is clearly buying euros on a large scale to hold down the yuan and safeguard export advantage in Europe, but it appears to be purchasing short-term debt of a one-year maturity or less and other liquid assets.

Even if the crisis is resolved, Italy and Spain may have to pay significantly higher borrowing costs to attract buyers. Anthony Peters from Swissinvest says large clients have been telling asset managers to eliminate Sourthern European risk. "They have kissed peripheral Europe good-bye," he said.

A fresh wave of eurozone panic prompted Italian authorities to call an emergency meeting on Tuesday and Spain's prime minister to delay his holiday as borrowing costs for the two nations hit fresh highs. Italy's economic and finance minister Giulio Tremonti is due to meet officials from the Bank of Italy and market regulators less than two weeks after ministers agreed a €159bn (£140bn) second bail-out for Greece.

Concerns that Spain and Italy will be the next victims of the eurozone crisis drove benchmark bond yields to all-time highs and unsettled stock markets. Yields on 10-year Spanish government bonds rose 25 basis points to 6.426pc, while Italy's 10-year bonds also hit highs of 6.219pc -edging closer to the 7pc levels that forced its smaller Greek and Portuguese neighbours to ask for a bail-out.

With Europe's politicians on summer break, analysts said markets were renewing their fears that Europe’s aid package for Greece and other bailed-out nations was not enough to prevent wider contagion. "This has all the features of a self-fulfilling crisis," Harvinder Sian, a senior bond strategist at Royal Bank of Scotland, told Bloomberg. "The rise in yields looks pretty relentless, and it doesn’t look as if the politicians are anywhere near to getting ahead of the curve."

The events forced Spanish prime minister Jose Luis Rodriguez Zapatero to delay his planned three-week holiday so he could keep a closer eye on the unfolding crisis. European stock markets were also heavily hit by the uncertainty. Italy's benchmark FTSE Mib stock index dropped 1.5pc to a 27-month low of 17,463.92, while bourses in London, France and Germany followed Asian markets lower, falling around 0.6pc.

Analysts are now looking to see how the two countries could prevent the eurozone crisis escalating to the next level. Italy is particularly viewed as 'too big to bail' because of its giant debt to GDP ratio - the highest of any eurozone country except Greece. "Perhaps Italy will have to look at the funds available through the European Financial Stability Facility (the eurozone's bail-out fund), and maybe on Italy's part they will have to announce some further austerity measures, but of course that will take time," said Charles Jenkins, director for Western Europe at the Economist Intelligence Unit.

Italy has already pushed through a €48bn package of austerity measures in an attempt to reach a balanced budget by 2014. Its central bank recently forecast the country's gross domestic product would grow by 1.1pc next year, less than the government's previous estimate of 1.3pc growth.

The eurozone debt crisis threatened to erupt again on Tuesday as Italy and Spain's borrowing costs hit record highs, helping to drive Britain's own borrowing costs down to a record low.

The euro also lost ground against most major currencies and the Italian stock market hit a 27-month low, as investors appeared to lose faith in the latest European rescue package. The yield, or interest rate, on Italian 10-year bonds rose to nearly 6.3% at one stage, with the equivalent Spanish bonds yielding almost 6.5% early on Tuesday. If yields reach 7%, a country has effectively lost the support of the international markets.

In contrast, UK 10-year gilt yields hit an all-time modern low of 2.76%, amid suggestions that the UK has become a relative safe haven in response to the debt crises raging in both Europe and America.

Jane Foley, senior currency strategist at Rabobank, said that Britain's economic fundamentals are "far from attractive", but less grim than other countries. "Slow economic growth, low interest rates, a highly indebted consumer sector and a large government fiscal deficit suggest there are clear similarities with the US," said Foley. "The UK government, however, has proved itself to be better positioned to tackle its deficit demons and although there has been a lack of progress to date on achieving deficit reduction in the UK, at least there is no crisis at present."

Italy under pressureThe cost of insuring Portuguese, Italian and Spanish debt also rose sharply on Tuesday, according to data from financial information provider Markit. Although Italy pushed through a four-year austerity plan in July, the scale of the country's borrowing needs are alarming investors. Last month's Greek bailout, which will see private creditors take a "haircut" on their loans, has also deterred some fund managers from buying more Italian debt. "We are not convinced that this is the finality of the haircuts," Johannes Jooste, a senior portfolio strategist at Merrill Lynch Global Wealth Management, told Bloomberg.

The Italian Economy Ministry, the Bank of Italy and market authorities are to meet on Tuesday to discuss the market turbulence, Reuters reported. Prime Minister Silvio Berlusconi will address Italy's parliament on the crisis on Wednesday. Italy's blue-chip share index, the FTSE MIB, fell 1.5% on Tuesday, hitting its lowest level since April 2009.

Osborne's wins Diamond's approvalThe record lows for gilts came as Bob Diamond, the American who runs Barclays bank, endorsed the chancellor's austerity measures and indicated that the policy was necessary to ensure that Britain retained its AAA debt rating. He also warned that the eurozone would be subject to "chronic event risk". At a time when the market is expecting the US to be stripped of its top notch rating, Diamond said it would be "more serious" if the UK were to be downgraded.

Market experts reckon that while the US, because of the sheer size of its bond market, might not incur punitive increases in its borrowing cost in the event of a downgrade, the UK would likely endure a sharp rise in bond yields. This would mean the UK would need to pay more to borrow. He said it was a "very positive" that the UK was ahead of its rivals in the EU with its cost-cutting measures - some £81bn of cuts are earmarked to take place in four years. "It's important to support the Prime Minister and the Chancellor," he said, in the efforts to cut the deficit and cut public spending.

Diamond, who was dubbed the "unacceptable face of banking" by Lord Mandelson while Labour was in office, also endorsed efforts by the government to shift the focus for economic growth on to the private sector from the public sector. Recent data shows the UK economy is stalling. The manufacturing sector shrunk back into the recession for the first time in two years in July while UK output grew just 0.2% in the three months to June.

The country needs ultra-loose money to offset €48bn of fiscal tightening and stave off a bond crisis. Instead it gets this, (from the Banca d’Italia):

Italy’s real M1 deposits have been contracting at a 7pc rate over recent months, and M3 is not far behind. This is catastrophic.

The ECB could prevent such a downward spiral. It chooses not to do so, and is therefore pushing Italy ever closer to the brink. (Yields have fallen slightly today on the relief rally from the US debt deal, but 10-years are still unsustainably high at 5.71pc).

This ECB policy risks a global systemic crisis. Italy has a public debt of €1.84 trillion, the world’s third largest after the US and Japan.

Fairly or not, Italy and Spain are chained together in this storm so the problem is in reality even bigger. The pair must be treated a single unit in systemic financial terms.

German M3 is growing at 8pc, but surely the ECB is not going to set policy for German needs and blow up the European financial system in the process? Or is it?

A recent surge in the purchase of credit default swaps shows that an increasing number of investors believe Italy is in trouble. Some experts doubt the CDS providers would be capable of paying out if Rome were to default.

Yields on Italian government bonds, it seems, aren't the only things rising in the country this summer as investors begin to ask if Italy will be the next domino to fall in Europe. Currently, more bets on credit defaults -- so-called credit default swaps (CDS) -- are being taken out on Italy than any other country.

With a gross CDS volume of almost $306 billion (€212.69 billion), the country is currently in the lead, ahead of Brazil ($179 billion) and Spain ($176 billion). Indeed, the desire among investors to bet on a default in Italy and Spain appears to be growing. Since mid-June, the bets against Italy have risen by $23 billion and those against Spain by $18 billion.

The figures come from the Depository Trust and Clearing Corp., the American trading platform, which, according to its own statements, is responsible for 98 percent of the global CDS transactions. Still, if a country does default, it doesn't automatically mean that the entire value of a CDS would be paid out. This is because betting partners often hedge the bet through offsetting transactions. So the maximum amount that would have to be paid out if Italy were to default would be about $25 billion. For Spain, that figure would be $18 billion.

But even at these amounts, experts have expressed doubt over whether the participants would actually be able to come up with their share of the bet. If some of these betting partners were unable to pay, it could rattle the markets even further. The reason is that a CDS works like insurance: Creditors purchase them in order to provide protection in case their debtor defaults. But the CDS market is also unregulated, and the derivatives played a role in the global financial meltdown in 2008 after the subprime mortgage market collapsed.

CDS securities are also purchased by hedge funds that don't have any vulnerable state bonds on their books. The hedge funds are speculating that the increasingly threatening financial situation in the debtor countries will lead to an increase in CDS prices and that, eventually, they will have to be paid out.

Spanish Prime Minister José Luis Rodríguez Zapatero has been discussing the financial-market turmoil with domestic and European Union political leaders Tuesday, after postponing a scheduled vacation as Spanish and Italian borrowing costs hit new euro-era highs.

A high-level Italian committee comprising officials from the Treasury, central bank and financial-sector regulators was due to meet late Tuesday to discuss the troubling trends in the sovereign-debt markets, a source said. The Financial Stability Safeguard Committee, or CSSF, will meet in Rome Tuesday, the person said. The meeting was convoked as the euro-zone's financial strains further enmeshed Italy's sovereign debt, which at €1.6 trillion in tradable bonds is the region's largest. Yields on typically stable two-year government bonds shot up to 4.64% Tuesday, from 4.35% at Monday's close, while equivalent German bund yields declined to 1.03% from 1.11%.

The Italian committee is headed by Economy Minister Giulio Tremonti. Other participants include Vittorio Grilli, director-general of the Treasury, as well as representatives of the Bank of Italy, the Consob securities regulator and Isvap, the insurance-sector regulator.

Mr. Zapatero canceled his vacation in order "to more closely follow" the country's "economic indicators" and has spoken with European Commission President Jose Manuel Barroso and Spanish opposition leader Mariano Rajoy, according to statements from the prime minister's office. A spokesman added that Spanish Finance Minister Elena Salgado was in touch with her Italian, French and German counterparts.

The Spanish government is not currently planning new measures to shore up investor confidence, but it stands ready to do it if necessary, Public Works Minister José Blanco said in remarks reported by state-owned newswire EFE. Mr. Blanco, who is also government spokesman, said the market volatility should be "transitory," according to EFE. A new bout of risk aversion, caused by debt crisis and worsening economic indicators in both the U.S. and the euro area, sent the spread between Spanish 10-year bonds and German bunds to 4 percentage points for the first time earlier Tuesday. It later fell back slightly.

Italian 10-year yields also rose sharply at the open, with the spread to bunds widening more than 0.3 percentage point. Shortly after 1400 GMT, Italy 10-year yields were still over 5.9%, and Spanish yields were over 6.2%. London bond traders said a lack of liquidity in the market was helping to magnify these moves. Investors sold off Spanish stocks, with the country's blue-chip IBEX-35 index down 1.2% at 9,203.3, at lows not seen since mid-2010.

The new spike in borrowing costs comes two days ahead of a Spanish bond auction Thursday, where the treasury plans to sell between €2.5 billion ($3.56 billion) and €3.5 billion of three- and four-year bonds. It also heightens concerns over the ability of Italy and Spain, the euro zone's third- and fourth-largest economies, respectively, to finance themselves. Greece, Ireland and Portugal started to get frozen out of markets when their 10-year bond yields reached levels of between 6% and 7%.

For Spain, the heightened market tensions come at an awkward time politically, as the country gears up for an early general election Nov. 20. Lacking a parliamentary majority and with his popularity undermined by the economic crisis, Mr. Zapatero announced Friday that he was calling elections ahead of the end of his four-year term in March.

Fears of a double-dip downturn on both sides of the Atlantic have set off fresh mayhem in Southern European bond markets, dashing hopes that Europe's summit deal in late July would contain the escalating crisis.

Italy's 10-year yields spiked through 6pc in wild trading and hit a record post-EMU spread over German Bunds, snuffing out a brief relief rally following Washington's debt deal. Spain's yields once again flirted with danger at 6.2pc.

"The markets know that the EU's bail-out find (EFSF) won't be able to buy Italian and Spanish bonds on the secondary market for another three or four months because the deal has to be ratified by national parliaments," said David Owen from Jefferies Fixed Income.

The summit accord did not increase the EFSF's firepower above €440bn (£380bn), leaving it unclear how EU leaders expect to cope as contagion engulfs the eurozone's bigger players. The fund has just €275bn left after pledges to Greece, Ireland, and Portugal. City analysts say it may take €2 trillion and a clearer German commitment to halt the panic. "The longer this paralysis goes on, the more investors fear a break-up scenario where the core countries pull out and leave the rest with the euro," Mr Owen said.

JP Morgan warned clients that Italy has a thin margin of safety and risks running out of cash to cover spending as soon as September. "Italy and Spain will run out of cash in September and February respectively, if they lose access to funding markets," said the bank's fixed income team of Pavan Wadhwa and Gianluca Salford. Worries about Italy's immediate cash level risks leading to "a self-fulfilling negative spiral."

While Italy has low private debt and avoided much of the credit bubble, it suffers from economic stagnation and a steady loss of competitiveness. Monetary tightening by the European Central Bank has compounded the problem, triggering a collapse of all key measures of the Italian money supply.

The warning came as the eurozone's PMI manufacturing data for July dropped to a 21-month low, with clear signs of a slowdown spreading to Germany, Austria and Holland. "It makes pretty dismal reading," said Howard Archer from IHS Global Insight. "It points to a marked loss of momentum in the previously healthily expanding core northern eurozone economies, as well as deepening growth problems in the struggling southern periphery."

JP Morgan said Italy had €44bn in liquidity for government operations at the end of May. It did not follow other countries in "front-loading" debt auctions while the going was good.

Spain is fully-funded until next year, but its fate may hang on what happens in Italy. "We believe the fate of the two countries is linked. It is very hard to imagine only one of the two losing market access," said the report.

Martin van Vliet from ING said Spanish borrowing costs are just 80 basis points shy of the level that "could cause margin requirements at central clearing houses", creating risks for Spanish banks that rely on €100bn in foreign repo financing.

The Milan and Madrid bourses both suffered a black Monday, led by bank shares. Intesa Sanpaolo slid 7pc and is now down almost 40pc since March. Unicredit and Fiat were both suspended briefly. The manufacturing index for Spain fell yet further below the contraction line to 45.7. "There are high chances the economy has again entered recession," said Luigi Speranza from BNP Paribas.

The Internaional Monetary Fund said last week that Spain "is not out of the danger zone" and needs to take urgent measures to stave off contagion. "The outlook is difficult and the risks elevated. Risks are tilted to the downside and potentially severe. Many of the imbalances and structural weaknesses accumulated during the boom remain to be fully addressed," it said.

Spain's exports are holding up well and the budget deficit has been slashed in half. However, the fund warned that Spain's debt profile is sensitive to "growth shocks" and rising interest rates. Each 40 basis point rise in funding costs would raise Spain's public debt by a further 14pc of GDP over the next five years, and a 0.6pc erosion of growth would add a further 7pc.

Critics have warned that austerity measures may abort recovery and short-circuit any improvement in public accounts, echoing the debate underway in Britain and other countries.

There has to be a good reason to keep euro leaders at their desks in the holiday month of August – this year there is

Less than two weeks ago the leaders of the eurozone were looking forward to an August sunning themselves on the beach after concluding a deal that was supposed to resolve once and for all the debt crisis on the fringes of the single currency. Now the euphoria seems a distant memory, redolent of Neville Chamberlain's "peace in our time" as the financial markets threaten two of the big beasts of monetary union – Italy and Spain.

As bond yields in both countries rose to levels not seen since monetary union was created more than a decade ago, Spain's prime minister, José Luis Rodríguez Zapatero, said he was postponing his three-week holiday to monitor economic developments. Italy's economics minister, Giulio Tremonti, called an emergency meeting to discuss how his country, which has the biggest national debt of any eurozone nation bar Greece, could cope with the speculative attacks.

Traditionally, Europe closes for business in August unless there is a good reason policymakers should be shackled to their desks. This year there is. When the heads of the 17 eurozone governments met in Brussels on July 21, they agreed not just to bail out Greece for a second time but to put together a war chest that would enable them to take pre-emptive action in countries seen as vulnerable to attack. The message to the markets was clear: monetary union will be protected come what may, so think twice before turning on Italy and Spain.

But it did not take long for the financial markets to unpick the Brussels agreement. They quickly discovered that while there was the promise of more money for the European Financial Stability Facility, it would take months for the funds to arrive, and then only if national parliaments agreed to pony up the cash. What looked on the surface a once-and-for-all solution was exposed as a naked attempt to buy time.

Events in the United States over the past week mean the respite has been short. The threat that even the world's biggest economy might welsh on its debts has reignited concerns about the weaker members of the single currency. Dismal growth figures from the US have made matters worse, since the chances of countries like Spain and Italy growing their way out of trouble will be impaired if the recovery in the global economy stalls. That now looks much more probable than it did a fortnight ago.

Nick Parsons, head of strategy at National Australia Bank, said: "Europe's leaders probably thought they had bought themselves three months. I thought they would get six weeks at best. It now doesn't look as if they will get as long as that.

"There is a growing sense of crisis enveloping markets in the northern hemisphere. Thus far asset markets in Asia have been holding up relatively well and currencies have moved in an orderly fashion. With increasing doubts about the forward momentum of the global economy, we will need to watch these Asian markets very closely for any signs of contagion. The month of August has got off to a very nervous start."

In their different ways, Italy and Spain exemplify the difficulties in making the eurozone work. Deprived of the ability to devalue its currency, Italy has struggled to remain competitive with Germany and growth has been sluggish. Spain, by contrast, had excessively strong growth in all the wrong parts of the economy courtesy of a one-size-fits-all interest rate. Cheap borrowing costs led to soaring asset prices, an unsustainable construction boom and a widening current account deficit.

Bond markets are now flashing warning signs about both countries. As Europe's sovereign debt crisis has unfolded over the past 15 months, markets have sensed a country is in trouble when the yield (interest rate) on its 10-year bonds has risen above 6%. The trigger for a bailout has been when yields have topped 7%. In Spain, the peak for yields yesterday was 6.45%; in Italy it was 6.14%.

"We are on the brink of a major sovereign debt crisis," said Danny Gabay, of Fathom Consulting. He added that there were similarities between Europe in the summer of 2011 and the US mortgage meltdown four years ago. Greece and Portugal were akin to America's sub-prime borrowers, who were the first to run into problem, but subsequently the crisis spread to borrowers with slightly better prospects. In the context of Europe, that was Italy and Spain, with Italy's national debt of 130% of GDP making it a more pressing problem.

Servicing that debt is impossible when growth is low and interest rates are 6%-plus and rising, which is why markets are now wondering how long it will be before Silvio Berlusconi's government seeks help from the EU and the International Monetary Fund.

Jerry del Messier, the co-head of Barclays Capital, the investment banking arm of Barclays, urged European policy makers to act quickly: "Markets don't always get it right, particularly in the summer months, when volumes are low and there is a temporary loss of confidence. We need a much more engaged response."

With talks between Italy and the euro group planned for Wednesday, David Owen, managing director at Jefferies Fixed Income said there were a number of key events in the coming days that could bring the crisis to a head - including a Spanish bond auction on Thursday and the release of data for Italian growth and US jobs on Friday. The suspicion in the markets is that Zapatero's three-week holiday could turn into a weekend break. At best.

Investors worldwide sold out of equities amid widespread worries of stalling global growth and renewed eurozone tension. Bond yields in Germany and US fell to new lows this year, while UK gilts yields were at a record low as Italian and Spanish 10-year government bond yields climbed decisively above 6 per cent to euro-era highs.

Spanish and Italian politicians rushed to formulate a fresh response to the debt crisis engulfing the two countries as their borrowing costs hit euro-era highs. José Luis Rodríguez Zapatero, Spain’s Socialist prime minister, delayed a planned summer holiday amid growing fears Madrid could become the latest European government to require a bail-out.

In Rome, Giulio Tremonti, finance minister, and regulators convened an emergency session of Italy’s Financial Stability Committee. He is due to meet Jean-Claude Juncker, head of the group of eurozone finance ministers, in Luxembourg today to discuss the burgeoning crisis.

The flurry of activity came against the backdrop of another big sell-off in markets. Yields on benchmark 10-year Spanish and Italian bonds peaked at 6.45 and 6.25 per cent respectively. The premiums Madrid and Rome pay to borrow over Germany also reached euro-era highs of 404 and 384 basis points. Both the yields and premiums are close to levels that pushed Greece, Ireland and Portugal into bail-outs.

The premium France pays to borrow over Germany also hit a euro-era high of 75 basis points. Analysts said it was difficult to see what could stop Spanish and Italian rates continuing to climb, particularly in light summer trading.

The sell-off follows continued uncertainty among investors about whether the European bail-out mechanism is big enough to deal with either Spain or Italy. It has been heightened by worries about the possibility of recessions in the US and Europe.

German 10-year yields dipped below the domestic rate of inflation briefly yesterday, for the first time since at least 1960. Britain’s benchmark borrowing costs, as measured by 10-year gilt yields, fell to lows not seen since 1946. US 10-year yields hit year-lows of 2.65 per cent.

In the US, the S&P dropped 2.6 per cent, its biggest one-day slide in nearly a year and turned negative for the year as it fell for the seventh straight day, a downward streak not seen since October 2008. Gold surged to a record just shy of $1,660 an ounce, while the Swiss franc hit all-time peaks against both the euro and the dollar.

In one of the biggest banks in the centre of Athens a clerk is explaining how his savers have been thronging to pull out their cash. Wary of giving his name, he glances around the marble-floored, wood-panelled foyer before pulling out a slim A4-sized folder. It is about the size of a small safety-deposit box – and those, ever since the financial crisis hit Greece 18 months ago, have become the most sought-after financial products in the country. Worried about whether the banks will stay in business, Greeks have been taking their life savings out of accounts and sticking them in metal slits in basement vaults.

The boxes are so popular that the bank has doubled the rent on them in the past year – and still every day between five and 10 customers request one. This bank ran out of spares months ago. The clerk leans over: "I've been working in a bank for 31 years, and I've never seen a panic like this."

Official figures back him up. In May alone, almost €5bn (£4.4bn) was pulled out of Greek deposits, as part of what analysts describe as a "silent bank run". This version is also disorderly and jittery, just not as obvious. Customers do not form long queues outside branches, they simply squirrel out as much as they can. Some of that money will have been used to pay debts or supplement incomes, of course, but bankers put the sheer volume of withdrawals down to a general fear about the outlook for Greece, one that runs all the way from the humble rainy-day saver to the really big money.

'Clueless' government"Every time the markets move, I get phone calls," says an Athens-based fund manager. "They're from investors asking: 'How can I get my money out of the country?' " One senior investment banker is more blunt: "People are scared that the government doesn't know what the fuck it's doing." He tells a story about an acquaintance who took out €30,000, wrapped it in a bag and stashed it in his garage. "The bag had previously had some food inside," he says. "So it attracted rats, who ate the notes."

Bags of money in garages, frightened savers fleeing banks and even the country: these aren't the sort of stories you associate with a comparatively-prosperous European country, but with a developing one facing a life-or-death economic crash. The fact that they are now emerging from Greece not only indicates the scale of financial distress, it suggests something else: Greece today looks like parts of Latin America in the worst moments of its financial crisis.

In an echo of the days of Jim Callaghan, the International Monetary Fund is back in Europe, doing what it is more accustomed to doing in Buenos Aires or Brasilia: making emergency loans and telling the government how to run its economy. What is more, the scale of the changes an overborrowed Athens is now making are so vast and so rapid that they will leave Greece looking like a different country.

The government itself describes its plan to slash public spending and jack up taxes as one of the most ambitious deficit-reduction programmes in the world. But what often goes missing from this discussion of a fiscal crash-landing is the impact on the lives of citizens who have precious little time to adjust. When salaries of civil servants are slashed by up to 30% within a few months, as happened last year, and over 20% of public-sector workers face unemployment within the next four years – plus whole swathes of national assets are to be privatised before Christmas, with more job losses doubtless to follow – then you are talking about a wholesale transformation of a workforce.

Greece is already one of the poorest and most unequal societies in Europe, reckons Christos Papatheodorou at the Democritus University of Thrace. Among the few countries that look worse are Romania, Bulgaria and Latvia. So what will Greek society look like after the government's austerity measures take effect? He pauses, then says: "It will probably look like a developing country."

That message has not been lost on workers either: one of the new nouns used by trade union members and others who oppose the cuts is kinezopeisi, or China-isation. The claim is that such large drops in wages will lead to a workforce paid barely more than their counterparts in Shenzhen.

The oddest thing of all is that some of the leading lights in the government appear to see nothing wrong in a wholesale transformation of Greek society, albeit not into one that resembles an enterprise zone in eastern China. Elena Panaritis is widely tipped as one of the up and comers in Greece's government, and it is not hard to see why: smart, formidably well-trained in economics after a career with the World Bank, funny and fluent in English, she is exactly the sort of person any prime minister would choose to give a keynote address to fretful institutional investors.

And for a Greek politician involved in pushing through some of the most abruptly painful economic measures in the country's history, she does not seem especially Greek. When I observe how many Apple computers are in her office, she replies: "That's because I'm not Greek, I'm American." Her speech is American-accented and peppered with "darn" and "have a nice day". When asked to describe how Greece needs to change its economy, her answer revolves around changing its institutions and its structures – in other words, making Greece less Greek. Castigating the bureaucracy, she says: "It's not a kibbutz, it's a big country!"

This is a line that you hear often enough from those who want Greece to change. By European standards, Greece has an average-sized public sector, but a very leaky tax collection system. What the public sector is, however, is under-resourced and inefficient. On my last day in the country, I wangle my way inside a public pensions office for those working in the tourism industry: there are just two Dell computers in one large room, and lever-arch files dating back 30 years. No one ever paid for the data to be computerised, I am told, and the result is that one day's work takes three.

Private sector woesThe other big problem is in the private sector, with few industries that are able to pay their way in the world. Jason Manolopolous, who is author of a new book called Greece's 'Odious' Debt, says that for years Greece was buying more from the rest of the world than it was selling. "We were buying BMWs from the Germans and selling them tomatoes."

For now, those days are well and truly over. In Athens' upmarket shopping district of Kolonaki, boutiques that used to have waiting lists for designer handbags have shut. One sign says the owners have relocated – to Rome. In one clothes shop, with racks of discounted Calvin Klein and DKNY, the manager, Sav, explains what's happened: "In this crisis, the middle classes have been hollowed out." That is just what happened in Buenos Aires during its crash last decade.

The result is that people who thought themselves used to one way of life, and in one social class, are getting used to a sharp downgrade. In one factory, where a staff of 200 is now down to 30, the manager points to empty floors and idle machines. They're now all on unemployment benefit, he says. "Mind you, our pay has been cut too, so we're not that far off."

Outside the soup kitchen of the Aghia Triada church in Piraeus, near Athens, more of Greece's new poor are waiting for a handout. Anna and her two daughters have walked in the midday sun to get here and are now queueing up with the long-term homeless. That is not Anna's situation though; she lost her job three years ago but has still hung on to her house. That said, she no longer has the income or the benefits to pay bills and the electricity was cut off last month.

Inside, Pater Daniel, the head priest, says that he's noticed a lot more "well-dressed, clean" people taking free meals from the church. He reels off stories of a 23-year-old man who left last week for Australia, and a 40-year-old woman who lost her job on Friday. Because the Greek Orthodox church is partly on the state payroll, the clergyman's salary has fallen by almost 10% to €15,000 a year.

Is he saying that the Orthodox church is also subject to public spending cuts? Pater Daniel laughs, then holds up five fingers: there are five priests in Piraeus, and soon there will only be one. He's pondering taking a second job. "There is too much pain, and people are looking for someone to listen and squeeze their hand." He sighs. "Everyday I leave this church with a headache."

The starting gun for one of the biggest fire-sales in western history was fired as Greek officials began appointing advisers for the country's ambitious privatisation drive. "Our target is clear, and it is to generate €1.7bn from privatisations by the end of September and €5bn by the end of the year," said the finance minister, Evangelos Venizelos.

After securing a second aid package to prop up an economy now dependent on international handouts to pay public wages and pensions, Athens has moved with record speed to divest itself of state assets ranging from prime real estate to loss-making companies.

By any measure it is a gargantuan task. At stake is Greece's €350bn debt, which before the EU and IMF agreed to bailout the country again was predicted to peak at 172% of GDP next year.

The socialist government says it aims to raise €50bn through the campaign by 2015. Enough, it is hoped, to not only make a dent in the debt but send a convincing message to the markets that have pummelled Athens since the onset of the crisis 18 months ago. The prime minister, George Papandreou, has cancelled his summer holidays to accelerate the dismantling of a sector that his father Andreas – Greece's fiery socialist premier in the 1980s – did much to foster.

International lenders have warned that if there no progress with privatisations they will withhold the next tranche of aid in September. "In more ways than one Papandreou is paying for the sins of his father," said Nikos Dimou, author of the bestselling book The Misfortune of Being Greek. "It was Andreas, after all, who did more than anyone else to run Greece into debt."

The appearance of For Sale and For Rent signs on everything from former Olympic venues to island locales, casinos, marinas and airports, has been met with unexpected acceptance by Greeks long weaned on state largesse. A growing majority appears to agree it is the only way of arresting soaring unemployment by attracting foreign investment. Experts estimate Athens could own around €300bn worth of state property, almost as much as the total Greek debt.

"There has definitely been a shift in mood," said Stefanos Manos, a former national economy minister in a centre-right government. "But that could easily change. It is very clear that the government is only doing this under great duress from [our] international creditors," he said. "With timetables being so pressing, I worry that the whole process is very ill-prepared. If it there is not enough transparency we may end up like Russia, where only a cast of oligarchs end up benefiting."

With the privatisation drive now seen as crucial to reviving economic growth, the government has actively courted countries with big sovereign wealth funds to invest in Greece. Last week Europe's paymaster, Germany, signalled it was interested in snapping up assets in the energy and tourism sectors.

At home tycoons who control large sectors of the media have also started jockeying for position in what one commentator called the "beginning of a civil war" to buy stakes in state companies. "It is going to be a minefield for the government," said political analyst Giorgos Kyrtsos. "The troika [of lenders] are not well-versed in Greek reality. The programme is overly ambitious."

After years of resisting privatisations, the breakneck speed at which Athens has agreed to conduct the sales – nearly one every 15 days – has raised fears that state jewels will be sold at rock-bottom prices. "In a buyer's market our biggest concern is that this entire process will only serve to benefit the forces of capitalism and do nothing to create development," said Yiannis Panagopoulos, president of the Confederation of Greek Workers, the country's biggest labour grouping.

"We will strongly oppose the sale of any sector in which the government has a strategic interest … there will be huge resistance if it tries to sell the electricity company, the water board, our post office or ports, sectors that are vital to developing this country."

The euro zone looks set to evolve into a transfer union as it struggles to overcome the debt crisis. There are a number of options for the institutionalized shift of resources from richer to poorer member states -- and Germany would end up as the biggest net contributor in every scenario.

As a practicing Catholic, Philipp Rösler knows that remaining true to your beliefs sometimes requires you to resist reality. The head of Germany's business-friendly Free Democratic Party (FDP) and the country's economics minister provided a hint of his unshakable conviction two weeks ago when the heads of state and government of euro-zone countries met in Brussels for an emergency summit to hammer out a second bailout package for Greece. "The summit showed that we are not headed toward becoming a transfer union," Rösler claimed.

In reality, the summit actually did push the European Union a good bit closer to becoming a transfer union -- with the forceful assistance of Rösler's boss, German Chancellor Angela Merkel.

Already decades ago, the European Union started providing financial assistance for building roads, setting up telecommunications systems and assisting underdeveloped regions. In 2009, Germany transferred €6.4 billion ($9.22 billion) more to Brussels than it received from it. France and Italy are net contributors as well, as opposed to Poland, Portugal and Hungary (see graphic). But whereas these sums are limited and earmarked for specific purposes, the measures tied to the euro bailout involve unprecedented payments -- especially after the meeting in Brussels.

If It Walks Like a Duck…Merkel and her colleagues have now pushed the doors wide open for a European community based on shared liability. As a result of their decisions, euro-zone member countries will have to provide much greater guarantees for the solvency of countries that have run into financial trouble. In other words, there will now be an even greater redistribution of wealth between the richer and the poorer states.

Past assurances have been forgotten. Just last March, Merkel promised, "I won't allow there to be a transfer union," and stressed that each country had to be able to pay its own debts. But, when it comes to the most recent bailout package, Merkel is only opposed to a transfer union that functions as an "automatic financial equalization scheme in Europe."

Experts see things differently. They refer to a transfer union as one in which collateral or loans can be transferred from one country to another whenever necessary. One of these experts is Jens Weidmann, the former economic adviser to Merkel who has now become the president of the Bundesbank, Germany's central bank. Weidmann sharply criticizes his former boss, but he couches his words in economic jargon, saying: "By shifting extensive additional risks onto the countries providing help and their taxpayers, the euro area has taken a major step toward a pooling of risk."

But others pronounce their judgment much more clearly. As Clemens Fuest, an economist at the University of Oxford, puts it: "Brussels was a considerable leap in the direction of a transfer union."

Winners and LosersThe heads of government decided that Greece, Portugal and Ireland would only have to pay approximately 3.5 percent rather than 4.5 percent interest on their emergency loans. At the same time, countries like Italy, Cyprus and Belgium will have to pay much higher interest rates on the money they have borrowed to help bail out these countries. "Taking out expensive loans and extending cheap ones -- that's a clear sign of a transfer union," Fuest says.

But that isn't the only feature. As part of the euro-zone bailout package, member states are putting their own good reputation and creditworthiness on the line in order to raise the money needed to help countries with teetering economies. In this case, there hasn't been any direct transfer of funds yet because the countries contributing them have so far only extended guarantees. But, in doing so, they have been freeing their cash-strapped partner countries from a major part of the risk.

The way that funds will be redistributed between donor and recipient countries will be similar if the Luxembourg-based European Financial Stability Fund (EFSF) extends bridging loans to Italy or Spain or if it takes the sovereign bonds of crisis-hit countries off the market by replacing them with its own. Doing so would bring relief to troubled states. But it would also make all of the other euro-zone countries accountable to investors for the debts of these troubled states.

Estimating the CostsMThe measures that the European Central Bank (ECB) has been using to assist the euro bailout work according to the same principle. The bank also buys up the sovereign bonds of debt-stricken states or accepts them as collateral for fresh loans. This has meant that several billion euros are now idling away on the ECB's balance sheets as risks that might costs member countries several more billion euros.

Admittedly, that would only happen if there were an emergency, such as if Greece, Portugal, Ireland or another member country announced it could no longer fully repay its debts. For this reason, the earmarked loans and guarantees have thus far represented only potential transfers.

Nevertheless, it is still possible to put a number on the figures involved. Deutsche Bank Research calculates that Germany bears a share of €144 billion for the bailout plans already decided upon, and that Germany could also be liable for an additional €110 billion as part of help provided by the ECB. Added to that are the at least €20 billion making up Germany's share of the second bailout package for Greece.

Skeptics are expecting even higher figures. They calculate that the EFSF bailout fund needs to be bolstered because it has taken on additional functions. Indeed, Fuest, the Oxford economist, assumes that it will have to be double or tripled -- or possibly even more. "If Italy gets into a crisis of confidence, even that won't be enough," he says. In that case, he believes that other euro-zone countries would have no other choice but to guarantee all of Italy's €1.8 trillion in debt.

Granted, since none of these countries would become completely insolvent, no one seriously believes that these amounts will actually become due. But many of them are still asking whether donor countries might be better served if all of the euro-zone countries shared a common economic government that paid attention to how they financed their national budgets. This move could come in two possible forms.

The Euro Bond OptionAccording to the first, countries in the currency union could set up common bonds known as "euro bonds." In this case, participating countries would come under scrutiny on the financial markets collectively rather than individually. What's more, using this common financial vehicle would lower the risk of having a member state slide into national bankruptcy. Unlike today, all of the participating countries would be required to pay the same interest rate. This would mean a significant reduction in financing costs for troubled states because creditors would know that all of the countries in this group were obliged to pay back the debts of any one of its members.

Backers of the euro bond option are also betting that there would be an increase in global demand for this new financial product. As they see it, it would be more attractive than the fragmented range of sovereign bonds currently on offer in the euro zone. Their attractiveness would then hopefully trigger a run on the common bonds that would increase their market value and thereby lower their interest rate.

Still, euro bonds would also have certain drawbacks, particularly for countries enjoying the top AAA rating of the rating agencies, such as Germany, France and Austria. The reason for this is that the common bonds would have a lower creditworthiness because they would also involve countries with lower ratings. In real terms, having their ratings lowered would force the more exemplary countries to pay higher interest rates than they have been.

Ansgar Belke, an economics professor at the University of Duisburg-Essen and a research director at the Berlin-based German Institute for Economic Research (DIW), estimates that it would burden Germany with up to €15 billion in additional costs each year. Other experts have put this figure at up to €25 billion.

Calculated over a 10-year period, these new bonds would probably cost the Germans much more than what they might have to pitch in for the bailout packages. Likewise, this also completely leaves aside the possibility of additional risks and knock-on effects. "Euro bonds could bring short-term relief to some countries," Belke says "But, over the long term, they would lead to disaster because they open the door to even more indebtedness." That is especially true for countries that are already heavily indebted: They could afford to borrow more money because their interest payments on the euro bonds would be lower.

The Equalization OptionThe second option would involve organizing a financial equalization scheme in the euro zone -- similar to the one used between German states -- that would see money flow steadily from stronger into weaker countries. Studies on this issue show that hundreds of billions of euros would have to be redistributed among the euro zone's poorer and richer countries in order to balance out the varying strengths of their economies.

For example, a study by the Freiburg-based Center for European Policy (CEP) assumes that prosperous countries would have to transfer €108 billion to their poorer partner countries in order to restore their creditworthiness. Deutsche Bank Research uses different levels of government income per capita as its basis, and says Germany would need to pay in €12 billion per year to balance out the differences.

Kai Konrad, the managing director of the Max Planck Institute for Tax Law and Public Finance, and Holger Zschäpitz, a senior writer at the conservative daily Die Welt, arrive at a much larger figure. According to their calculations, the figure would reach the horrendous annual amount of roughly €74 billion. This kind of transfer union, they write, would be "neither economically nor politically feasible, nor a desirable prospect."

Known UnknownsNo matter which of these options were employed to level the playing field via a financial equalization scheme, two things are already certain: It would be expensive, and Germany would be one of the major financial contributors.

Of course, this is already the case with the bailout mechanisms currently in place. But there would be one critical difference: Under the current schemes, there is still a chance that the bailouts would finally end and that Germany would at least get part of its money back. But, under a permanent financial equalization scheme, neither of these would be possible.

Is the party over for the German economy, which has been enjoying its strongest boom since reunification? Sentiment indicators and company forecasts point to a slowdown caused in part by weakening activity in China. Fears are also growing about the US outlook and the simmering euro debt crisis.

Germany staged an impressive recovery from the 2008/2009 global economic crisis, but there are increasing signs that the boom is now coming to an end. After almost two years of strong growth, its economic outlook is starting to deteriorate, due to a slowdown in major emerging markets including China and fears of a possible United States recession caused by $2.4 trillion in spending cuts linked to the debt ceiling deal.

Various indicators released in recent weeks point to a deceleration of Europe's largest economy. The Ifo business climate index for July fell sharply to its lowest level in nine months, and analysts say it is likely to keep dropping. The ZEW investor sentiment index showed the weakest level since January 2009. And the Markit/BME purchasing managers' index for the German manufacturing sector fell 2.6 points in July to 52 points, its lowest level since October 2009. "New order levels went into reverse in July, as fewer export sales helped end a two-year period of sustained growth," Tim Moore, senior economist at Markit, said.

German engineering orders in June rose by just 1 percent year-on-year, after having jumped 21 percent in May, the VDMA engineering industry association said. "There are initial indications that demand for invesment goods has become less dynamic in Germany and in the other euro member states," said VDMA economist Olaf Wortmann.

In addition, top German firms have given more cautious outlooks for the remainder of 2011. Analysts have been paying particularly close attention to what is being said by the chemicals industry, which is regarded as a bellwether for the general industrial outlook because it supplies many different sectors. BASF, the world's largest chemicals company, last week reported a slowdown in sales growth in the second quarter and said its business momentum was likely to continue weakening in the second half.

Corporate Outlooks Revised DownAnalysts have been lowering their 2011 earnings forecasts for many top German companies in recent weeks following a second-quarter reporting season that failed to live up to expectations.Over the last year, the German boom has been impervious to surging oil prices, an appreciating euro and the European debt crisis.

Its success in achieving far stronger growth rates than most of its European partners has been attributed to the German business model, with officials and economists praising the country's long-term approach to business, its strength in technical innovation, and the culture of consensus between employers and trade unions that has kept wage costs down for over a decade.

However, Germany has also faced accusations, particularly from the United States and France, that it has been growing at the expense of other major economies. German firms have boosted their competitiveness over the last decade by keeping wage costs in check, thereby limiting consumer spending and imports and ensuring that Germany has been running trade surpluses with most of its major partners for years.

Calls by Paris and Washington for the government to boost domestic demand and redress the chronic trade imbalance have fallen on deaf ears in Berlin. The German recovery was led by surging exports to high-growth emerging economies, especially China, which has had a nearly unsatiable demand for the products in which Germany specializes -- high-performance cars and machinery.

Bad News for the Rest of EuropeThe slowdown in the Chinese economy is beginning to bite, however. Faltering growth in Germany will have knock-on effects on the rest of the euro zone, which has relied on its core economies, Germany and France, for growth while the high-debt nations such as Greece, Portugal and Spain are weighed down by austerity programs aimed at overcoming their debt problems. First-quarter gross domestic product growth was so strong that Germany is still likely to achieve 3 percent growth in 2011.

Peter Bofinger, a member of the German Council of Economic Experts, a panel of economic advisers to the government, said the debt crises in the US and Europe could lead to a marked slowdown in the German economy. "We will see significantly weaker growth rates in Germany than in 2010 and 2011," Bofinger told Rheinische Post newspaper on Monday. "Growth rates of more than 3 percent are a thing of the past."

There are two ways of cutting a deficit: raising taxes or reducing spending. Raising taxes means taking money from the rich. Cutting spending means taking money from the poor. Not in all cases of course: some taxation is regressive; some state spending takes money from ordinary citizens and gives it to banks, arms companies, oil barons and farmers. But in most cases the state transfers wealth from rich to poor, while tax cuts shift it from poor to rich.

So the rich, in a nominal democracy, have a struggle on their hands. Somehow they must persuade the other 99% to vote against their own interests: to shrink the state, supporting spending cuts rather than tax rises. In the US they appear to be succeeding.

Partly as a result of the Bush tax cuts of 2001, 2003 and 2005 (shamefully extended by Barack Obama), taxation of the wealthy, in Obama's words, "is at its lowest level in half a century". The consequence of such regressive policies is a level of inequality unknown in other developed nations. As the Nobel laureate Joseph Stiglitz points out, in the past 10 years the income of the top 1% has risen by 18%, while that of blue-collar male workers has fallen by 12%.

The deal being thrashed out in Congress as this article goes to press seeks only to cut state spending. As the former Republican senator Alan Simpson says: "The little guy is going to be cremated." That means more economic decline, which means a bigger deficit. It's insane. But how did it happen?

The immediate reason is that Republican members of Congress supported by the Tea Party movement won't budge. But this explains nothing. The Tea Party movement mostly consists of people who have been harmed by tax cuts for the rich and spending cuts for the poor and middle. Why would they mobilise against their own welfare? You can understand what is happening in Washington only if you remember what everyone seems to have forgotten: how this movement began.

On Sunday the Observer claimed that "the Tea Party rose out of anger over the scale of federal spending, and in particular in bailing out the banks". This is what its members claim. It's nonsense.

The movement started with Rick Santelli's call on CNBC for a tea party of city traders to dump securities in Lake Michigan, in protest at Obama's plan to "subsidise the losers". In other words, it was a demand for a financiers' mobilisation against the bailout of their victims: people losing their homes. On the same day, a group called Americans for Prosperity (AFP) set up a Tea Party Facebook page and started organising Tea Party events. The movement, whose programme is still lavishly supported by AFP, took off from there.

So who or what is Americans for Prosperity? It was founded and is funded by Charles and David Koch. They run what they call "the biggest company you've never heard of", and between them they are worth $43bn. Koch Industries is a massive oil, gas, minerals, timber and chemicals company. In the past 15 years the brothers have poured at least $85m into lobby groups arguing for lower taxes for the rich and weaker regulations for industry.

The groups and politicians the Kochs fund also lobby to destroy collective bargaining, to stop laws reducing carbon emissions, to stymie healthcare reform and to hobble attempts to control the banks. During the 2010 election cycle, AFP spent $45m supporting its favoured candidates.

But the Kochs' greatest political triumph is the creation of the Tea Party movement. Taki Oldham's film (Astro)Turf Wars shows Tea Party organisers reporting back to David Koch at their 2009 Defending the Dream summit, explaining the events and protests they've started with AFP help. "Five years ago," he tells them, "my brother Charles and I provided the funds to start Americans for Prosperity. It's beyond my wildest dreams how AFP has grown into this enormous organisation."

AFP mobilised the anger of people who found their conditions of life declining, and channelled it into a campaign to make them worse. Tea Party campaigners take to the streets to demand less tax for billionaires and worse health, education and social insurance for themselves.

Are they stupid? No. They have been misled by another instrument of corporate power: the media. The movement has been relentlessly promoted by Fox News, which belongs to a more familiar billionaire. Like the Kochs, Rupert Murdoch aims to misrepresent the democratic choices we face, in order to persuade us to vote against our own interests and in favour of his.

What's taking place in Congress right now is a kind of political coup. A handful of billionaires have shoved a spanner into the legislative process. Through the candidates they have bought and the movement that supports them, they are now breaking and reshaping the system to serve their interests. We knew this once, but now we've forgotten. What hope do we have of resisting a force we won't even see?

Central Falls, Rhode Island, whose motto is "a city with a bright future," cast a shadow across the rest of the state yesterday by entering bankruptcy.

Rhode Island’s poorest city sought court protection after retirees failed to accept cuts in pensions and benefits, pushing it into insolvency, according to Robert Flanders, a former state Supreme Court justice named to oversee Central Falls finances earlier this year. The city asked the court to let it impose "a prudent plan" to adjust what it pays retirees.

The city’s plight echoes an imbalance found in other municipalities across the U.S., including Vallejo, California, and Harrisburg, Pennsylvania, where local governments failed to curb spending to fit shrinking economies. In Rhode Island, the move into court is sounding an alarm because many local pension plans are "considerably underfunded," the state’s auditor- general said in a report last year.

"Unless there’s pension reform, Central Falls may not be the last municipality in Rhode Island that faces bankruptcy," said Gary Sasse, former Governor Donald Carcieri’s chief of administration. "No question Central Falls was unique and was an economic basket case but there are other communities in the state with locally administered pension plans that are in serious trouble."

Fifth Municipal BankruptcyCentral Falls, a city of about 18,000 located about 6 miles (9.7 kilometers) north of Providence, became the fifth U.S. community to enter bankruptcy this year, compared with six in 2010, according to data compiled by Bloomberg. Others may follow including Jefferson County, Alabama, where last week commissioners postponed a vote on what would be the biggest U.S. municipal bankruptcy, and Harrisburg, which has flirted with such a move since last year. Vallejo’s plan to exit bankruptcy won approval last week. It entered court protection in May 2008.

The Rhode Island city’s pension plan is expected to run out of assets by October without additional funding or significant concessions from both current workers and retirees, Moody’s Investors Service said in a June 17 report. The rating company cut the city’s credit one level to Caa1, the fifth-lowest mark, from B3. Both are below investment grade. "I still can’t understand why a city this size can’t run on $15 or $17 million dollars," said Jerauld Adams, 41, chairman of the Board of Trustees of Adams Library, which volunteers keep open three days a week after Flanders fired all the paid workers on July 1. "And they don’t even have to take care of their own school system."

Declining EconomyCentral Falls’ economy began to decline in the 1970s with the departure of manufacturers including textile makers from Providence north to the Massachusetts line. From 1997 through 2009, at least 11 textile plants closed, eliminating almost 1,400 jobs, including 280 at Elizabeth Webbing Mills in Central Falls, National Council of Textile Organizations data show.

The city’s demographics also changed with an influx of people from Latin America including Mexico and Colombia, as well as from Puerto Rico and Portugal. By 2000, the population was almost half Hispanic, according to U.S. Census Bureau figures. By 2010, that ratio had risen to about 60 percent. Crime increased with the city’s economic decline as manufacturers slipped away. In 1986, the smallest, most densely populated city in Rhode Island was crowned the Cocaine Capital of New England in a Rolling Stone magazine article.

Aid CutsBy the early 1990s, the state had taken over the city’s schools, including 100 percent of the funding. The march toward bankruptcy began in the past few years as Rhode Island slashed other local aid to cope with the financial crisis and the recession it spawned, said state Senator Elizabeth Crowley, a Central Falls Democrat.

The city has about $21 million of debt outstanding, New York-based Moody’s said. Per-capita income in Central Falls is 50 percent of the Rhode Island average, the company said. The City Council in May 2010 sought a state-appointed receiver to formally take over finances for Central Falls. Flanders, who was named to the post this year, cut costs yet needed contract concessions on pensions and other benefits to align revenue with spending.

The city had "no option" except seeking Chapter 9 bankruptcy protection after service cuts and the unsuccessful effort to curb labor and retiree costs, according to court papers. A "substantial majority" of city spending is tied to employment, and because of pending salary increases called for under contracts, those costs are set to rise, according to court documents.

‘Insolvent’ City"The city’s financial condition has deteriorated to the point where it is insolvent," Flanders said in the filing. "The overwhelming pension obligations and the slowing economy, among other factors, have significantly decreased revenues while the city’s operational costs have increased."

Central Falls has a structural budget deficit of about $5.6 million on an annual general-fund budget of about $16.4 million, according to court papers. By Aug. 31, the city won’t be able to pay its bills, the filing said. It also has an unfunded liability of about $80 million for pensions and other post- employment benefits after the city failed to make regular contributions for its workers, Flanders said.

"You could say it’s not fair because all of us have contributed to the pension plan for our whole careers on good faith," said John Garvey, the city’s acting fire chief who has worked for the department for 25 years. "We had to, there was no choice, we had to contribute. Now part of it is not going to be there."

No One EnrichedCrowley, the state senator who is a former Central Falls City Clerk, says going bankrupt isn’t fair to retirees. "There’s nobody getting rich on pensions in this city," she said in a telephone interview.

The community’s financial difficulties "are much bigger" than the cost of labor and benefits, Marc Gursky, a lawyer for the firefighters union, said by telephone. The city should also be negotiating with bondholders and the state to come up with a solution, he said. "Firefighters or police or a handful of workers at City Hall aren’t going to be able to solve the city’s problems," Gursky said.

Yet there is little sympathy on the streets of Central Falls for the city’s 141 retirees. Last week, they had a chance to vote on accepting the receiver’s plan to slash benefits for some by as much as half, and now face the reductions anyway if the court approves. Just two of the 141 accepted the cuts.

No Pension Waiting"They’re just fat cats collecting money," said Rob Choquette, who was part of a three-man construction crew working in the city center yesterday. "I have the threat of getting injured every day and no pension waiting for me."

Rhode Island’s auditor general said in a report last year that there are 24 municipal pension plans in the state that have less than 45 percent of the assets they need to meet their obligations, largely because they haven’t made required payments. State Treasurer Gina Raimondo and Governor Lincoln Chafee, an independent, have pledged to deliver sweeping proposals to the Democratic-controlled Legislature in coming months to overhaul public pensions.

"The governor is worried if Central Falls succeeds easily in the bankruptcy, maybe there are a couple of other cities and towns in Rhode Island just waiting to see what happens and jump on the bandwagon," said the city library’s Adams.

In scenes reminiscent of the Great Depression these are the ramshackle homes of the desperate and destitute U.S. families who have set up their own 'Tent City' only an hour from Manhattan.

More than 50 homeless people have joined the community within New Jersey's forests as the economic crisis has wrecked their American dream. And as politicians in Washington trade blows over their country's £8.8 trillion debt, the prospect of more souls joining this rag tag group grows by the day. Building their own tarpaulin tents, Native American teepees and makeshift balsa wood homes, every one of the Tent City residents has lost their job.

These people have been reduced to living on handouts from the local church and friendly restaurants and the community is a sad look at troubles caused as the world's most powerful country struggles with its finances. 'We have been in and out of the camp for a year,' said ex-hotel worker Burt Haut, 43, who lives with his wife, ex-teacher Barbara, 48 in a tent styled like a teepee from the Old West. 'Our financial difficulties since the credit crisis three years ago have caused us to camp on public ground, at the back of churches and down the backs of closed down stores. "We have had help from our friends and family, but we have run that well dry.

We are trying to get back on our feet and with help from the camp leadership we hope to get back onto a social security scheme or help with some assisted housing.' Ravaged by the loss of their jobs and their homes, the residents of Tent City struggle to get by without day-to-day luxuries that we take for granted such as food on the table and a roof over their heads.

Ex-minister Steve Brigham, 50, runs Tent City, which consists of a dirt road running through a two-acre encampment which has flowerpots laid out front of proud tents and homes. Functioning as near to a normal town as possible, Tent City is governed by democratic rules agreed by all the residents. They all must agree to no fighting, to clean the camp, to volunteer their time when they have it, and to most importantly keep the noise down after 10pm.

The camp is currently involved in a legal battle with local Ocean County authorities which wants to remove the camp and the case has gone all the way to New Jersey Superior Court. Steve and the community of Tent City want Ocean County to provide a purpose built shelter for the homeless and are working with a local lawyer working who works for free. 'This is a place to recover, to dry out, to get back on your feet to help to re-enter the world,' said minister Steve who was ordained eight years ago but has given up all his possessions to live in poverty with the growing community in Tent City.

'We have a petrol-powered generator that heats up the water for the shower and lets us wash up dishes after donated meals. 'We have pet chickens which are not for eggs, they are to eat the ticks that could make us feel very ill with Lyme disease or a blood infection. 'It is a racially diverse community with Mexicans, Polish, Irish, African American and white people. 'There are eight women living here too, which was a problem in the past, but has now made the camp more calm by their presence. 'The struggle for every day existence here makes us realise how lucky we are when we have our homes and our lives all in front of us with our televisions and microwave meals.'

Even though the camp has relied heavily on the ingenuity of Steve and his able helpers, keeping hope alive in Tent City is his toughest task. 'We have a working chapel here that is built out of recovered wood and a tarpaulin roof,' explained Steve. 'In summer we perform the service outside in a circle laid out with chopped tree bases as seats. 'It is not a requirement to come to a service, but spirituality and hope can help these people who have hit their darkest hours.'

One couple who have lived for over a year in the camp are Elwood and Cynthia, who have both built there own cabin complete with functioning door and even have got themselves a sofa. 'We have upgraded from our tarpaulin tent to a balsa wood one, which should help us in the winter in case the snow weighs down our roof,' Elwood said. 'Hopefully in the summer too the temperature wont be so hot as well. 'Every help we get from Steve puts us that bit further on the path to a social security cheque or a government assisted housing scheme. 'I used to work cleaning for a local restaurant and Cynthia used to be a waitress.'

For Burt and Barbara the care that they receive here is preferable to living on benefits provided by the Government. 'The care and community offered by the Tent City is wonderful,' said Burt. 'It is just like getting back to nature and it makes you realise that all our wonderful appliances like microwaves, telephones and even cars are not essential. 'Food, shelter and water is what you need and is what we get here.'

One member of the motley crew who lives in Tent City claims to be the nephew of country great Johnny Cash. 'I used to be a guitarist and played at BB Kings' club in New York City,' said Mark. 'But my girlfriend left me, I lost my home and I travelled round Toms River near here sleeping rough. 'I was told about Tent City and minister Steve by a fellow homeless person and I walked down here and approached him for a space in his camp.

'It is like a family here and he helped me get set up with a camping tent and now I have friends and people to talk to, which I have not had since my life collapsed. 'My family can't seem to help me no more and I have accepted that every time that they have tried to I have let them down and failed to sort my life out. 'I don't know what I would do if I didn't have this place to live in.'

The relentless pursuit of productivity is socially divisive, environmentally destructive and doesn't make us any happier

Last week, on the same day that we learned economic growth in the UK was running at a miserly 0.2%, the Office for National Statistics launched a new programme of work on measuring human well-being.

The latter was the result of a month-long survey in which the public were asked what mattered to them. To barely disguised yawns, the answers that came back were, "family, friends, health, financial security, equality and fairness in determining well-being", according to national statistician Jill Matheson.

So we were caught on one hand between a low-grade, generalised fear that people weren't buying enough stuff to keep the economy going, and being told on the other hand something we already knew deep down: that a better quality of life stems not from consuming more, but from a range of mostly immaterial things. Crucially, in a society like the UK, enjoyment of these does not correlate in any positive, straightforward manner with economic growth. On the contrary, some policies used to promote growth can directly undermine a range of the factors that do contribute to well-being, such as the time we need to spend with family, health, equality and fairness.

Depending on how it is pursued, economic growth can be jobless, socially divisive and environmentally destructive. It can, in other words, be "uneconomic growth". In a quite extraordinary intervention, as part of the government's desire to cut spending on public services, Oliver Letwin, the coalition's policy minister, recently suggested that "fear" of losing your job should be used to increase the productivity of workers.

This approach appears to be wrong on so many levels that I first thought it had to be a spoof. It will do nothing for growth; it chronically misunderstands how to get the best out of people; it contradicts the prime minister's own public conversion to the importance of well-being at work and, perhaps most importantly, it misunderstands real productivity.

In professions like health and education, if you drive out costs (ie people) you get a worse service. Quality of care and nurturing depends to a huge degree on attentive human contact in a convivial context. Subject people to old-fashioned Taylorist production-line management, coupled with the intimidation of a threatened job loss, and nobody wins.

It is wrong, also, because buried in this conundrum, may also be the secret of how, in the long term, we align our livelihoods and lifestyles with the limited planet on which we depend. This is about designing an economy of better, not more. And that suggests fundamentally rethinking what we mean by efficiency and productivity.

An economy that is more based on services, and in which we are sharing, repairing, recycling, reusing, learning, collaborating and coproducing services (that's the jargon, at any rate – it just means give and take) is one in which, ultimately, we may have more people doing fewer things in formal paid employment. In that context, we might have more time for "family, friends, health", and all the things that do add to our well-being.

The big objection is that growth is needed for jobs, and that these are what we need for financial security. On one level, yes, of course. However, financial security is also a function of equality and fairness, and given other economic problems (such as that many of the jobs created in a push for growth alone do not deliver financial security) as well as environmental constraints, there may be more reliable paths to find security. Inequality both creates insecurity and raises a society's costs in relation to health problems, crime and almost everything else.

Redistribution of income and access to employment, therefore, compared with generalised, unequal and resource-hungry growth, can be quicker, less destructive and a more effective way of delivering security.

A sensible approach to enhance economic activity in a way that met many needs would be to take Vince Cable's suggestion of another round of quantitative easing, but instead of just spraying a general injection of cash via the banks (who take a cut) into the economy, to channel it into the productive low-carbon economy – a sort of green easing.

Sadly, that doesn't look likely to happen any time soon. For now the captain of this ship insists we're all heading south, when there are all kind of indicators telling us that our real needs can only be met by going north.

143 comments:

Helena Smith - Guardian :"The appearance of For Sale and For Rent signs on everything from former Olympic venues to island locales, casinos, marinas and airports, has been met with unexpected acceptance by Greeks long weaned on state largesse. A growing majority appears to agree it is the only way of arresting soaring unemployment by attracting foreign investment."

um. what? Exactly how is foreign purchase of anything going to suddenly make customers appear- which is what you'd need, in order for there to be "jobs" -

That's one of the better examples I've seen recently of how desperately people will cling to old ideas- particularly when they have absolutely nothing ahead with with to replace the failed ones.

"and I was thinking I can't remember having heard one word on job creation during that entire debate.

"Which I find an utter disgrace; not just because it's insulting to the 10-20% of Americans who don't have jobs, but also because it should be blindingly clear that without new jobs, and lots of them, the American economy can't possibly recover."

I have to think one of the reasons nobody wants to talk about jobs is- they have no real idea about WHAT jobs could be created, or why. Beyond CCC types of make-work.

"Japanese electronics maker Hitachi is planning to end production of TV sets and outsource the job to Taiwanese and other makers."

and: "A record number of Japanese households were living on welfare benefits in April, reflecting the severe employment situation.

"The welfare ministry says about 1.46 million households were receiving assistance in April. "

And, from NYT:

http://tinyurl.com/43kfrgx

"Wholesale prices for half-inch white pearls have fallen about 30 percent in the last several years, as the influx of high-quality Chinese farmed pearls — grown in former rice fields — has the industry in turmoil...

"Mr. Qiu showed off experimental armoire-sized sorting machines that he had designed. Each machine drops a pearl every few seconds and photographs it from several different directions as it falls. The machine instantly evaluates the photos, then catches the pearl and assigns it a trough to roll into a bin of similar pearls.

"Each of the machines can run 24 hours a day, Mr. Qiu said, and will replace 15 workers."

And here in Minnesota- the MN dept of Agriculture has outsourced their phone calls looking for reports on the apple crop. My call came from Virginia.

WASHINGTON (AP) — The Agriculture Department says meat giant Cargill is recalling 36 million pounds of ground turkey linked to a death in California and at least 76 other salmonella illnesses.Illnesses in the outbreak date back to March and have been reported in 26 states coast to coast.Government officials say that even contaminated ground turkey is safe to eat if it is cooked to 165 degrees and handled properly before cooking.

35 million pounds. must be a jobs creation thing- they've already kept turkey wardens occupied, now they can hire people to collect, transmutate, and resell it. Officials say it's safe. Turkey feed, probably.

This is a thought that I've also had. Society wants, but doesn't really need more jobs for people to design and build better TVs, computers, or automobiles. There are already too many MBAs and attorneys, and too many people in school studying these fields.

On a related note, I work in an engineering capacity for the MIC, and the refusal to acknowledge that technical progress has stalled or reversed in some areas is stunning.

These are otherwise educated people who think SpaceX is going to privatize our way to Mars even though we are currently reduced to hitching a ride to the international space station with the Russians in their ancient, but extremely durable, Soyuz module.

Then again, these poor folks are so trapped in the Matrix that they absolutely cannot acknowledge the fact that NASA's foundation was almost entirely built with the men, materials, and knowledge produced by "Operation Paperclip".

Speaking of Operation Paperclip, I read a book last year that dealt with it in some detail from a different angle. It was The Hunt for Zero Point by Nick Cook. The book has several defects and deals with a controversial subject to say the least, but the author is a journalist and a high ranking aviation editor of Jane's Defense Weekly, which I imagine would give it some credibility. Anyway, I just brought it up because your mention of Operation Paperclip jogged the memory and I would imagine that you would find it at the least, entertaining, though the way the SS dealt with some of its top scientists at the end was barbaric and gruesome, though not nearly as much as with their slave labor that excavated by hand huge underground laboratories and bunkers.

Got this tip from Mad Max:Citi's Top Economist Says The Water Market Will Soon Eclipse Oil

Read more: http://www.businessinsider.com/willem-buiter-water-2011-7

Could these BFC people possibly get any more delusional?

I'd better hurry up and file the paperwork for patent on my design for the Spring-Loaded Guillotine- "Smaller, lighter and more portable than the original, fit's easily in the trunk of your average sedan!"

Good idea, but we don't need a better guillotine. What is needed is any guillotine and people prepared to use it. Please review Fred's 2005 commentary that I linked earlier. It's the people not the instrument or lack thereof that is a problem.

@p01, I wonder how that " lost " tribe govern themselves? With what appears a small selection for reproduction is there inbreeding? Wonder if their brains are wired differently than ours?I know, curiosity from the outside world will destroy them.

If you are really interested in these people, you might try reading The Storyteller by the Peruvian novelist Mario Vargas Llosa. It is a very interesting read and enters the world of these people which is nothing like the universe ensconced in our brains. My feel for the book, for what it is worth, is that Llosa got his anthropology right. He did win a Nobel in literature, which hopefully is worth more than Peace or faux-Economics. Another novel I read by him while hanging out in the high mountains of Peru was Death in the Andes. A good read and good also for my street smarts as the title might imply.

Looks to me right now like TSHTF v. 2.0 (bond and stock markets). Just in time for Usakistani austerity. Let's see what the Politburo (congressional gang of 12) forces down the gullet like a French goose. Glad to see that the pretenses of democracy have been ceded for greater efficiency.

Tell me again why the USA needs less gov. when the private sectors can and will regulate itself.

cough, cough!

http://www.bbc.co.uk/news/world-asia-pacific-14387817

Wealthy Chinese begin farming after food-safety scares

The Chinese authorities have enacted stricter policies to ensure food safety.It includes a directive from the Supreme Court calling for the death penalty for cases in which people die as a result of poor food safety.

But regulations are often flouted in China. And with food price inflation rising, some producers will continue to cut corners in order to fatten up the bottom-line.

When the bank turns you down for a loan, you just say that you didn't need the money anyway. Your wallet is flush with cash, thank you very much. Borrowing at current market rates would be suicidal, so Tremonti is just baffling us with his bullshit, and going incognito to Brussels on the midnight train - false wig and beard on rubber bands.

Do the Big Boyz have to wait 3 business days after they sell equities to have control of the proceeds like e-Trade pissants do? Just wondering where the remaining cash is going to flow. Gold didn't go parabolic today.

Also, one should keep in mind that 70% of equity trading is now done in "dark pools," and of the 30% on the exchanges, 70% of that is done by robots. Hmmm. That leaves 9%.

"One year ago, Testwell Laboratories, a concrete testing company, and two Testwell officials were found guilty of falsifying results on major public works projects. On Thursday, the owner and five engineers at the company chosen to replace Testwell surrendered to face charges that they did the same thing on some of the same projects and hundreds of others. "

Another lucky glitch:NYSE Glitch Halts Derivatives Trading, Updates“This is a really scary market. It’s so busy and for people not to be able to get out of their positions or hedge on today of all days is really terrible.” Gee, you think so?

With an interesting synchronicity with Ilargi's lead first theme of job creation - not, CHS published today a major remedial piece on the nuts and bolts of job creation in Amerika. A definite must read. (Re the ending the War on Drugs section, "ice" is street slang for crystal methamphetamine).

Also,

For the day traders here and Cheryl, predicting a giant plunge in the S&P in the last half hour of trading. Nobody will want to stay long overnight. The Milan bourse might find the giant plug to their computers and put it back in the outlet after they wipe Tremonti's prints. Will Manuel have to take a pay cut if this keeps up?

It's interesting to ponder how TPTB will respond this ongoing and deepening global market shallacking. I, for one, have argued before that they could sacrifice everything but the USD and Treasury market for the rest of this year, in effect using the severe deflationary sell off as a means to further concentrate wealth (via increased value of cash/treasuries, asset foreclosures and backdoor bailouts of large institutions) and, of course, use it as a justification for further oppressive legislation, fiscal/monetary policy and foreign policy in the near future.

Of course, IR policy would remain extremely accomodative in the US and Europe and there are also less direct methods of providing some support to the equity and credit markets. For instance, the Bank of NY charging fees on cash deposits over a certain amount, as reported by ZH earlier today. Or the ECB picking up the monetization slack by printing Euros for bonds, with the Fed opening dollar swap lines in the shadows. It wouldn't be nearly enough to keep the markets stable, but they may not crash as hard and as quickly. On the other hand, there are some good arguments to suggest the TPTB might capitulate sooner, as in next week, in terms of QE. Letting the systemic fear associated with deflationary collapse take the reigns for much longer may be a bit too much, a bit too fast for the major financial institutions, who need consumers/debtors to retain some level of confidence in the system. Personally, I still lean heavily towards my former argument, but only time will tell. Either way, the word of the week, the month and the last few years still remains... Deflation.

I find the greatest argument right now against QE3 is that the rest of the world except for a portion of the Eurozone is fed up to teeth (pun intended) with what Putin referred to earlier in the week as the giant "Parasite" on the world's economy. I think that a resumption of QE3 will result in strict hot money currency controls from much of the world. There are only two ways that countries can stop Fed QE from inflating their economies. One is to lower their own CB lender rate. But this just changes foreign money inflation for domestically induced bubbles. And the other is currency controls. The Boyz may not wish to take a chance with that. Strict currency controls are like that torpedo down the garbage vent of the globalized death star.

Also,

Amy Goodman of Democracy Now! keeps pushing and distorting the crimes of the Assad regime against a CIA sponsored armed insurrection. I always regarded her as far from the brightest bulb in the pack, but as the US levers the Security Council to duplicate their Libyan attack dog invitation against Syria, I am starting to regard her as just another "progressive asset."

Good point. From the global perspective, the benefits of QE3 may still be greatly offset by the costs, esp since QE is becoming less effective with every iteration, and that's even more true when it was already priced in by many investors on various rumors.

So what's 4-5% of 50 or so trillion dollars (global equity market cap)? A shit load of imaginary wealth disappearing in one trading day, that's what. Next up: Asian markets.

"Amy Goodman of Democracy Now! keeps pushing and distorting the crimes of the Assad regime against a CIA sponsored armed insurrection."

That's interesting, since just earlier this month she interviewed Jeremy Scahill, who explained in detail how the CIA was running a covert facility in Mogadishu to train Somali "counter-terrorism" operatives, as well as a prison. The CIA of course denied the running the prison, but it admitted to paying the salaries of the Somalian people running the prison! You would think Goodman could connect a few simple dots... unless she is an "asset" as you said.

Got a question for when TSHTF, no one can deny it any longer, and you're living on a small island covered with US military bases (Okinawa). What happens to the military? If there's war with China, Okinawa would be a good target. If there's a free-for-all style collapse, I imagine brainwashed and willing-to-kill marines with their guns swarming the island. Does anyone have any thoughts on possible scenarios in regards to the military? Seems unlikely they'll be shipped back to the States. Like they'll stay here one way or another- to kill or be killed. And yes, I know that most military members are probably decent people. I just find they're not too aware of a lot of things, most likely by design.

Your concern is probably not entirely unfounded. The US military is a peculiar animal, as befits a peculiar empire. I expect they will try to hang onto Okinawa as long as they possibly can. And it will turn out to be longer than they should. If the Pentagonians cannot sustain them, one must assume they will turn to the age old practice of foraging. I have no idea at all how soon that situation could develop.

I do not share the IMHO altogether too common opinion that China and Usanistan are inevitably headed for war. As I said, our military is a peculiar animal. It costs as much to just maintain our forces as would normally be spent on a major war. Even little wars like AfPak cost an additional fortune. Worse yet, much of our materiel including vital components of JDAM bomb guidance units are made in China. We would be compelled to bomb our own factories and our major banker. If it happens it won't end well.

Wouldn't be a bit surprised if Cheryl is correct (for a day or two anyway), and we see a 2% rebound tomorrow. BTFD bitchz! Or alternatively, read CHS's book.

But I don't want a mansion by the sea surrounded by vacuous, silly neighbors who need Manuel to pick their tomatoes. And I don't want a yellow Jaguar. I know quite a bit about mechanics and they barely function under the best of circumstances. Cheryl, you make a poor Princess of Darkness in a Faustian sense. Couldn't you bribe us with an offer we couldn't refuse. Be creative!.

Despite all the hoopla about the military and patriotism on Veteran's and Memorial Days, when push comes to shove, this is what the owners and their planners think of boots on the ground.

"Military men are dumb, stupid animals to be used as pawns for foreign policy." Henry Kissinger, quoted by Bob Woodward in The Final Days, 1976.

I go along with IMN but a little stronger in tone. I cannot think of place I would rather be less than Okinawa when the Empire goes into serious collapse mode. I give serious odds that the Empire will not want the expense of collecting its "animals" and shipping them home. This might engender a certain bitter frustration which would be taken out on the local inhabitants. "Foraging" would be a polite term.

BTW, in a Google search to get the quote right, I came across this specialized famous quotation site which might offer hours of amusement and simply amaze your friends and associates.

Cliff High of Half Past Human predicted there would be 3 major market seizures starting early August, with peaks (of panic) in September, October & December.

(My loose interpretation of "The Shape of Things to Come 2011/2012 Issue Eleven")

The astrological comparisons with 1929 - 1937:

The Saturn, Uranus, Pluto T square this blogger has described in these comment threads previously is now falling apart corresponding to the second phase down of economic collapse of the great depression. The problems were not dealt with, now cometh the pain.

There have been a few developments since Strangelove, er I mean Kissinger befouled the air with those words. We don't know what they do or where they are doing it. But this not so little group are not your typical dumb animals, they're killers.

They are probably doing TPTB's bidding right now, but you never know. Changing the target list wouldn't be that hard.

Re war with China:I hope there's no war with China, because if it is, that's it, period. I strongly suspect we'll see a nuke or two go off in crowded places, but I sincerely hope there's not a full out war, because if it is, not many will make it. If I were anywhere in Japan, I would leave right now, while it's still possible. OZ/NZ would make a nice destination.

Thanks for confirming my feeling about Okinawa, it's a big help especially when noone else I talk to here seems to be thinking about this. Yes, "foraging" is too kind a word for what will happen if and when order ceases to be imposed on the "animals".

>Despite all the hoopla about the military and patriotism on Veteran's and Memorial Days...

Oh, yeah, make people so poor they have few choices but to seek "employment" with the military- there's great benefits, and you're defending America and her freedom! I could go on and on about the astounding blindness and ignorance I've witnessed working for a company where 95% of our customers are military. I feel bad for them, but when you try to explain how they're being screwed, they just don't want to know.

We are outta here! Just as soon as this typhoon moves on and we figure out where to go to, haha.

LOL, Australia and NZ were on the list of possible places to which to flee. They're very attractive for being perhaps the places most distant from nuclear, and from most of the rest of the crazy, crazy world (though they do have their own problems).

I hadn't really seriously considered war between the US and China. Until I discovered the completely unscientific but compelling Hopi prophecies, which state that the US will be destroyed by nuclear war with the likes of China, the middle east, or some other "old civilization(s)". All except the four corners area in the Southwest. I know, that last part makes the whole thing much more far fetched.

Still, they have that line about how this crazy way of life will come to an end soon once a gourd of ashes (atomic bomb) is dropped from the sky. Among other things. I don't know if this stuff was made up after the fact or what, but the prophecy does seem to be nearing fulfillment.

And Ford the headbanger. But don't forget Baby Bush (read Darth Vader) wanted to appoint him Chairman of the 9/11 Commission, but he refused to be vetted and hand over his Rolodex with all of his asshole commercial buddy clients of Kissinger Ass. Probably had a score of the Bin Laden klan :-)

And Ford the headbanger. But don't forget Baby Bush (read Darth Vader) wanted to appoint him Chairman of the 9/11 Commission, but he refused to be vetted and hand over his Rolodex with all of his asshole commercial buddy clients of Kissinger Ass. Probably had a score of the Bin Laden klan :-)

And debt shall have no dominion.Destitute men naked they shall be oneWith the man in the vault and the west market;When their bonds are picked clean and the clean bonds gone,They shall have swaps at elbow and foot;Though they go broke they shall be solvent,Though they sink through the ceiling they shall rise again;Though creditors be lost credit shall not;And debt shall have no dominion.

Yeah, the last big one splashed down in the Gulf of Mexico 65,000,000 years ago, so I am counting on one any day now. Could at least solve the banker infestation problem as the last one did the dinosaur problem. Made the world safe for us pesky little rodents.

Also

Orlov has a modest proposal on how to use your iPhone to extend your virtual life.

"In any struggle, it’s important to know the nature of your enemy. Is he a klutz, prone to a goofy mistake now and then, or does he have murder on his mind? Again, we are being lorded over by a gang of criminals. War criminals.

For two years, there was a military entertainment complex inside a Philadelphia area shopping mall. At the Army Experience Center, young teens could play shoot them up, blood splattering video games for free, while those over 18 could climb into a realistic mockup of a tank or chopper to massacre bad guys in desert settings, also for free. An advertisement: SHOP FOR SOCKS. GRAB A BITE. PILOT AN AH-64 ATTACK HELICOPTER. After receiving 40,000 visitors and enlisting 236 recruits, the Army decided to shut down this 13-million dollar facility on July of 2010, “It’s been a great success. Basically it’s mission accomplished.”

Though it had planned on opening more of these centers, the Army soon realized there was no longer a need. Thanks to the Mother of All Depressions and rapidly increasing unemployment, desperate Americans are flocking to recruitment stations even without the promise of a free video game. It’s a win, win situation for our military industrial complex: destroy the economy, and Americans will enlist. They will beg to be blown up."

The Okinawans are not terribly fond of the USArmy--something to do with the regular rapes and assaults by servicemen. So it would be an unsafe place as the hegemony crumbles. That being said, there is sufficient jingoism that I would expect every person will be brought home. I bet they won't spend a lot of time on clean-up, though...

Damon Vrabel Is saying that there are 18 banks that control the worldand more banks under this hierarcy and according to IlargiBanks look like they are going to fail. Damon said that as banks fail the larger ones will grab them and get even more powerful.My question is that do these banks know what they are doing and do you think this cartel will collapse.

Jingoism comes easily to the fat and happy. I'm not hearing near as much of it as I did just a very few years ago.

The Imperial Toads are always reluctant to accept that the empire is collapsing. By the time they are willing to admit the foreign occupation troops cannot be supplied, it will be too late to pull them out. Think Field Marshall Von Paulus being denied permission to withdraw from Stalingrad and how that worked out. Imperial hubris is IMHO the deadliest kind.

I wrote quite a long time ago that the troops in Afghanistan will probably someday have to fight their way to a seaport, hijack a commercial vessel and force it to bring them home. Once here, expect them to want to kill somebody. It happened to Roman legions, why not ours?

These first two seem a lot like things Stoneleigh has been predicting would happen. I like the way Art Cashin put it on NBC News this evening, as best I recall it. "In a market like this you don't sell what you'd like, you sell what you can."

The dollar soared against a basket of currencies. The greenback's surge came amid a weakening economic outlook and moves by Japan to intervene in the forex market to bolster the yen.

1) It makes the Fed look like its doing something.2) People with risk assets want it thinking that it will re-levitate the market.3) It is the only thing left that the Fed can do (other than international swaps)4) With Zirp in place, it is the only thing that BB **knows** how to do. It is his helicopter.

Factors against QE3

1) It pisses off the bottom 85% of the Usakistani consumerate who are finally getting the picture that it is responsible for price increases.2) It pisses off the rest of the world which will probably start hard hot money currency controls if the Fed starts it again. These controls are not appealing to the owners.3) As time goes on, it has been been less and less effective in achieving either its real covert goals or its public goals4) The Fed balance sheet is already swollen with a lot of sewage. They really don't want to make it even larger.5) The owners don't want the dollar to lose its reserve currency status right now. QE3 would grease the skids.

I don't know that much about 401-k's, but I was reading that you can borrow against them. I would look into that. I don't know the details and that is where the devil resides. Borrow as much as you can and put it in 90 day T-bills maybe. There is talk that Timmah wants to eliminate that option.

Anyway, remember that my advice is worth exactly what you paid for it :-)

I remember when 401-K made its appearance. After reading just a few details, the word that came to mind was TRAP! Needless to say, it got none of my money. In my recollection, it was the Reptiles first big move. In my estimation, it has done and will do a lot of damage.

Ilargi - I noticed your tweet that crashes occur from oversold conditions. I hadn't ever known or noticed or heard of that, and was wondering if you could point to some instances where that occurred, and some reasoning about it.

I anticipated the current decline because sentiment was extremely bullish (meaning we were ripe for a decline). But even within a decline we can have oversold conditions, and we look like we're near such a condition now.

Folks, It has crossed my poor tired mind that this might not be how the boyz "Wanted"to cash out.....Methinks the mindset and History of stock collapses shows that Mr. market will skin and fry any and all "On the backside." And especially those who are "players",who think they "Know"the market.This also includes the "dark pools",Ect,and those who run the illegal and Amoral high speed trading.

One cannot forever "Win".Even a stacked deck will fail you after the mark figures out whats going on...The longer the odds are stifled,the worse is the payback.

I would like a few more years before things get any more seriously wild...Looks like I might not get it...We have a very long way to fall.

@Nassim, Just last night a conversation about immigrants arose with a group of senior ladies in the courtyard of my building. Same words, " Too many immigrants/foreigners in Canada..." I immediately spoke up and said, " You mean people like my family?" It became clear very quickly that the issue was non white, non english speaking immigrants. I pointed out the heroic men applying the stucco to our building, men from all parts of the world with a variety of skin tone, working like slaves in the heat to do a necessary job that Cdn " white " men view as beneath them. Shish, I had to give a little talk on the role immigration has played in creating this Canadian nation etcLater I thought about what Stoneleigh said about contraction and its affects on society. People become fearful of difference, less willing to share declining resources. In typical contraction mode the conversation then moved on to attack people in my building on disability...whew...What sweet relief to return to my wee apt. and the cat:)

I tried talking to my father-in-law and he sees the problems but can't/won't see the repercussions. He's over-invested in real estate, imo. He thinks that Paris real estate is a safe investment and that riots can't happen.

One things that surprised me is that the city of Paris owns a lot of flats. It seems to me that at some point they may have to sell them to get money, which will drive down prices.

I asked before and didn't get an answer. How do Stoneleigh's views differ from Prechter's, or do they?

Bob Prechter and I have very similar views on finance, collective psychology and the nature of markets, but I regard the area of overlap as just one part of the big picture. You wouldn't look to elliottwave analysis for the fundamentals on energy, resource shortages, ecosystems, pollution, population, carrying capacity, disease, nutrition, geopolitics etc.

I don't share Bob's politics, and his view of economics is quite different from mine too - far more conventional. His socionomic perspective, as valuable as it is, is much narrower than what we do here. I recommend his work, as I have found it very informative over the last 15 years.

I would say the main difference between Stoneleigh, and those of us who largely agree with her, and Prechter is the method of prediction. Prechter subscribes to Elliot Wave Thoery, which is basically a form of technical analysis that uses fractal "wave formations" to predict market movements within a certain range of probability, perhaps in conjunction with other technical indicators. This method of analysis leads him and his followers to make quite specific predictions about where the market is headed and when.

Stoneleigh does not operate at that level of specificity, which is a wise move IMO. She (and others here) tend to use macro-economic theory, such as Fisher, Minsky and Keen's debt deflation models and financial instability hypothesis, to predict long-term trends in financial markets. These predictions are also supplemented by broader trends in energy and environmental systems, as well as corresponding social and political ones.

So while both Stoneleigh and Pretcher believe we are in a secular bear market, and sociopolitical mood will necessarily deteriorate over the duration of a deflationary collapse, I would say that Stoneleigh's "predictions" about the market are framed in a significantly more general manner, and perhaps look to similar historical episodes as a general guide to how deflationary episodes play out with regards to market action.

Prechter is also not nearly as "big picture", as he does not incorporate factors such as peak oil into his analysis. The implications of the latter are extreme in every sphere of modern society, even more so than financial collapse, and also provide support for the long-term HI case (following severe deflation), which I do not believe Prechter has advocated before.

Golem XIV has several new posts up on the market meltdown. Get'em while they're hot.

My take on it. The MotU, not the brightest bulbs in the candelabra, never had a clue that the Universe was just trick-fscking them. Sadly, the evidence that the Universe bends toward justice is awfully thin. So we might as well assume that we all get to go down with them. Of course, collectively we did aid and abet them so I suppose that might be considered just.

I try to avoid committing to ‘all bullish’ or ‘all bearish’ opinions. Good places to follow are Calculated Risk (a bit bullish) and Doug Short (a bit bearish). Both stick with data. Most reasoned bear case is probably Stoneleigh, least reasoned would be pick your spot on Zero Hedge. Ironically, a lot of the establishment is now hyper-bearish albeit indirectly: the Tea Party has just short-circuited Wall Street’s life support.

It became clear very quickly that the issue was non white, non english speaking immigrants.

scandia,

The Norwegians have had expansion for a long while. The UK is somewhat different as they still see these people as a left-over from their empire/commonwealth.

What will happen in places like Norway when they do have serious stress. I guess we may find out sooner than expected.

One things that surprised me is that the city of Paris owns a lot of flats. It seems to me that at some point they may have to sell them to get money, which will drive down prices.

Chas,

If these are the flats I am thinking of, they are ones for insiders - for the management of la Ville de Paris and their political cronies. The flats are let out at well-below market rates. Chirac, who was mayor or Paris when I lived there, got into trouble over it at one time.